Concerns about ongoing inflation pressures weigh on TSX, U.S. markets

Canada’s main stock index moved lower Thursday on broad-based weakness a day after the central bank chose to hold its key interest rate, while U.S. markets were mixed.

Ongoing concern over inflationary pressures and the future of interest rates continued to put pressure on equities as bond yields rose, said Macan Nia, co-chief investment strategist at Manulife Investment Management.

“As we entered September, global markets, especially in the U.S., were priced for perfection. There was this notion … that the Federal Reserve was going to cut six times next year in 2024, and it was also the sentiment that we had maybe perhaps avoided a recession in the U.S.,” said Nia.

But that made markets vulnerable this month, he said.

“The focus on inflation, the focus on bonds as a result is not going away anytime soon.”

The S&P/TSX composite index was down 94.88 points at 20,132.08.

In New York, the Dow Jones industrial average was up 57.54 points at 34,500.73. The S&P 500 index was down 14.34 points at 4,451.14,while the Nasdaq composite was down 123.64 points at 13,748.83.

While the threat of a recession is being held at bay, the downward trend of inflation has not been linear, said Nia. Markets are increasingly pricing out rate cuts for next year, cutting their expectations in half amid more evidence that the economy is holding strong, he said.

Economic data from the past week points to inflation being stickier at current levels than what the markets were hoping for, said Nia.

Yesterday, the Institute for Supply Management’s latest report said U.S. service industries showed stronger growth last month than expected.

And a report on Thursday showed that fewer U.S. workers applied for unemployment benefits last week than expected.

“It just continues to highlight that the U.S. consumer remains resilient as of right now,” said Nia of the initial jobless claims report.

Inflation concerns continue to simmer in Canada as well, where markets were digesting Wednesday’s interest rate hold by the Bank of Canada.

In a speech Thursday, the central bank’s governor Tiff Macklem said interest rates may have to rise further if that’s what is necessary to bring inflation down to the 2% target.

“I think central banks across the world are very conscious of the fact that they don’t want to give any sign that the inflation fight is over … for the fear of reinvigorating inflation expectations that they have worked so hard to bring down over the past couple of years,” said Nia.

He said while the economy is clearly continuing to chug along, he’s watching for signs that the consumer is weakening under the weight of higher rates.

Credit card and debt levels are increasing, while savings rates are declining, noted Nia, putting consumers, especially Canadians, at risk.

“Although it’s too early for a trend, you’re definitely starting to see the weakness in the consumer because of higher cost of living and higher interest rate costs,” he said.

The Canadian dollar traded for 73.13 cents UScompared with 73.24 cents US on Wednesday.

The October crude contract was down 67 cents at US$86.87 per barrel and the October natural gas contract was up seven cents at US$2.58 per mmBTU.

The December gold contract was down US$1.70 at US$1,942.50 an ounceand the December copper contract was down two cents at US$3.76 a pound.