TORONTO — North American stock markets fell as a dovish member of the Federal Reserve suggested the central bank will be aggressive to address red hot inflation.
Governor Lael Brainard, who has been nominated to be Fed vice-chairwoman, said in a speech Tuesday that reining in the hottest inflation in 40 years is “of paramount importance” and that the central bank is set to keep raising short-term interest rates following its March hike, the first since 2018.
She said rates will increase in a methodical way but the bank’s massive bond-buying program designed to support the economy following the arrival of the COVID-19 pandemic would be cut as soon as its next meeting in May.
Anish Chopra, managing director with Portfolio Management Corp., said the rate hikes were expected but the comments about rapidly cutting its balance sheet may have prompted the bigger market concern.
Investors are worried “that overall you’re going to get a far more aggressive Fed, which gives you a higher risk of a recession because if the Fed is aggressive as opposed to going slowly, there’s the chance that they overdo it and the economy tips into a slowdown or a recession,” he said in an interview.
Deutsche Bank on Tuesday became one of the first big banks to predict a U.S. recession.
The S&P/TSX composite index closed down 154.77 points to 21,930.83 after setting an intraday record high of 22,213.07.
In New York, the Dow Jones industrial average dropped 280.70 points at 34,641.18. The S&P 500 index was down 57.52 points at 4,525.12, while the Nasdaq composite was down 328.38 points or 2.3 per cent at 14,204.17.
Brainard’s comments came ahead of Wednesday’s release of minutes from the Fed’s March meeting, that could also shed light on its upcoming tightening path. The European Central Bank will release minutes from its latest meeting on Thursday.
Chopra said it’s clear that interest rate increases are coming around the world.
U.S. 10-year bond yields that had inverted with two-year bond yields resumed their climb to the highest level of the year.
“I think it reinforces the slowdown … (and) if you look at it observers are concerned, the market is concerned that we could get into a recession based on aggressive central bank action.”
Commodities and technology fell Tuesday on concerns that a slowing economy or recession will reduce demand for oil, metals and tech products.
“So lower demand for technology products, lower demand for commodities and you can just see that in the prices of the equities, it’s just a potential for lower earnings in the future if there’s a recession,” Chopra said.
Materials dropped 2.5 per cent on lower gold prices, while shares of Lithium Americas Corp. plunged 10.6 per cent.
The June gold contract was down US$6.50 at US$1,927.50 an ounce and the May copper contract was up 1.4 cents at nearly US$4.80 a pound.
A decrease in crude oil prices pushed the energy sector down 1.6 per cent with Crescent Point Energy Corp. losing 5.9 per cent.
The May crude contract was down US$1.32 at US$101.96 per barrel and the May natural gas contract was up 32 cents at US$6.03 per mmBTU.
The Canadian dollar traded for a nearly five-month high at 80.31 cents US, compared with 80.06 cents US on Monday.
Chopra said the loonie has lagged and been detached from the price of oil.
“But today is one of those catch-up days where despite the price of oil being down, the Canadian dollar is moving up. But for the last number of months the Canadian dollar really hasn’t done much despite the price of oil moving up quite a bit.”
The technology sector was weaker with Hut 8 Mining Corp. down 5.4 per cent and Shopify Inc. 3.2 per cent lower.
Health care, industrials and financials were among the eight losing sectors on the day.
Consumer staples led the TSX, climbing on support from grocers with Loblaw Companies Ltd. up 3.1 per cent.
This report by The Canadian Press was first published April 5, 2022.
Companies in this story: (TSX:L, TSX:HUT, TSX:SHOP, TSX:CPG, TSX:LAC, TSX:GSPTSE, TSX:CADUSD=X)
Ross Marowits, The Canadian Press
Note to readers: This is a corrected story. A previous version had the incorrect day of the week.