Canada’s main stock index declined Thursday, led by losses in utilities, base metals and telecom, while U.S. markets also fell after the latest report on inflation south of the border.
Headline inflation in the U.S. was slightly higher in September than expected on a year-over-year basis, remaining unchanged from August’s report, though it continued to slowly moderate on a monthly basis.
But it’s core inflation that the U.S. Federal Reserve is really looking at for its monetary policy decisions, said Ian Chong, portfolio manager for First Avenue Investment Counsel Inc.
That figure, which excludes food and fuel, was in line with expectations as it continued to decelerate, he said. Core prices were up 4.1 per cent from a year earlier, the smallest increase in two years, compared with a 4.3 per cent increase in August.
Inflation is still too hot for the Fed to loosen its grip, said Chong, but expectations are still that it won’t raise rates again in November, or perhaps even in December.
“They are very close to the end of the rate hiking cycle,” he said.
However, Thursday’s data does bolster expectations that rates will remain higher for longer, said Chong.
“It’s not about how high rates need to go anymore,” he said. “It’s now how long rates need to stay at elevated levels.”
Ten-year bond yields crept back up throughout the day after the inflation release, said Chong, after having eased somewhat earlier in the week. Equities, meanwhile, were mixed but relatively flat before selling off in the afternoon.
The S&P/TSX composite index closed down 163.60 points at 19,500.24.
In New York, the Dow Jones industrial average was down 173.73 points at 33,631.14. The S&P 500 index was down 27.34 points at 4,349.61, while the Nasdaq composite was down 85.46 points at 13,574.22.
Shelter costs were the main driver of U.S. inflation in September. This illustrates just how difficult the last mile of the Fed’s inflation fight will be, said Chong. The central bank’s tool for fighting inflation — interest rates — is also sending shelter costs higher, albeit on a lag, and those make up a large portion of inflation.
“As you’re raising rates to cool inflation, you’re also increasing the costs of housing,” said Chong.
“It is a very fine line. So it is going to be difficult to bring down.”
Investors are also gearing up for the major U.S. banks to start releasing third-quarter earnings on Friday, Chong said.
“Those banks will provide a very important outlook on the American consumer and their financial situation.”
The Canadian dollar traded for 73.22 cents US compared with 73.51 cents US on Wednesday.
The November crude contract was down 58 cents at US$82.91 per barrel and the November natural gas contract was down three cents at US$3.34 per mmBTU.
The December gold contract was down US$4.30 at US$1,883.00 an ounce and the December copper contract was down two cents at US$3.59 a pound.
— With files from The Associated Press