TORONTO — Canada’s main stock index slid to a nearly three-week low as minutes from the last Federal Reserve meeting reinforced fears that aggressive moves to fight inflation will prompt an economic slowdown.
The S&P/TSX composite index closed down 142.23 points to 21,788.60, its lowest level since March 17.
In New York, the Dow Jones industrial average dropped 144.67 points at 34,496.51. The S&P 500 index was down 43.97 points at 4,481.15, while the tech-heavy Nasdaq composite was down 315.35 points or 2.2 per cent at 13,888.82.
A risk-off sentiment gripped North American stock markets Wednesday as minutes from the U.S. central bank’s March meeting were released.
They indicated that bank governors “general agreed” to reduce its balance sheet — or amount of securities it had acquired to increase the money supply during the COVID-19 pandemic — by US$95 billion per month. It would also consider larger, 50-basis-point interest rate increases, over the next few meetings, starting in May.
“The Fed minutes came out and really reiterated that message that we’re going to see a more aggressive Fed in the coming months as it tries to tighten financial conditions and get its arms around the inflation problem,” said Todd Mattina, chief economist at Mackenzie Investments.
Governor Lael Brainard, viewed as one of the more dovish members of the Fed, gave an advance peek at the minutes Tuesday when she said she expected a combination of interest rate hikes and a rapid balance sheet reduction. The comments sparked market losses.
And even though chairman Jerome Powell laid the case in March for this action, markets were a bit surprised that so-called quantitative tightening was going to take place earlier and at a bigger scale than some had anticipated, said Mattina.
“Many analysts out in the marketplace had thought that quantitative tightening might kick off even in the fourth quarter this year. It now looks very likely that the Fed will implement QT at its May meeting, with implementation starting either in May or June,” he said in an interview.
Mattina said investors are primarily concerned that the central bank will make a policy error like it did in 2017, 2018 when it began raising interest rates as the economy was recovering and then had to quickly unwind some of those interest rate hikes.
“I think the Fed is trying to engineer a soft landing with disinflation while maintaining a very tight labour market, and we’ve seen historically that that’s a very hard thing to pull off,” he said.
The equities selloff was accompanied by 10-year bond yields increasing to a high of 2.66 per cent, the most since before the pandemic.
While stock markets sold off after the minutes were released, they quickly recovered some of the losses.
“Some of this I think is just the market coming to terms digesting the news, impact of the Fed minutes and realizing that some of this was already well known to the market and priced in,” Mattina said.
Technology was the biggest laggard on the TSX, losing 3.3 per cent as shares of Lightspeed Commerce Inc. and Shopify Inc. fell 7.5 and 6.4 per cent, respectively.
Energy was down 1.5 per cent as crude oil prices decreased nearly six per cent to a three-week low. Vermilion Energy Inc. fell 5.8 per cent and Whitecap Resources Inc. was 5.0 per cent lower.
The May crude contract was down US$5.73 at US$96.23 per barrel and the May natural gas contract was down 0.3 of a cent at US$6.03 per mmBTU.
Crude oil prices fell on concerns about reduced demand from an economic slowdown, geopolitical uncertainties stemming from the war in Ukraine and U.S. stockpiles increasing last week.
However, Mattina said the deeply downward sloping futures curve suggests that markets don’t believe high oil prices will remain over the next several years.
The Canadian dollar traded for 79.94 cents US compared with 80.31 cents US on Tuesday.
The June gold contract was down US$4.40 at US$1,923.10 an ounce and the May copper contract was down 5.7 cents at US$4.74 a pound.
Utilities was the best performer on the the TSX, gaining 1.4 per cent.
This report by The Canadian Press was first published April 6, 2022.
Companies in this story: (TSX:VET, TSX:WCP, TSX:LSPD, TSX:SHOP, TSX:GSPTSE, TSX:CADUSD=X)
Ross Marowits, The Canadian Press