S&P/TSX composite edges lower after brief rally on Bank of Canada announcement

A sign board in Toronto shows the closing number for the TSX on Thursday October 29, 2020. THE CANADIAN PRESS/Frank Gunn. FNG

Canada’s main stock index closed in slight negative territory Wednesday, reversing the morning rally that came after the Bank of Canada announced plans to hike its key interest rate by half a percentage point.

The S&P/TSX composite index closed down 16.95 points at 19,973.22, after what was a relatively directionless day for equity markets.

The TSX did jump briefly mid-morning, shortly after the Bank of Canada announced it would hike its key interest rate to 4.25 per cent — the highest it’s been since January 2008.

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Since March, the central bank has raised its key interest rate seven consecutive times in an effort to bring inflation down and slow the economy. Throughout the process, markets have been jittery as investors fear rate hikes may go too far and tip the economy into recession.

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Giles Marshall, senior vice-president and portfolio manager with Fiduciary Trust Canada, said prior to the announcement, economists had been divided over whether the Bank of Canada would go for a 25 or 50-basis-point hike.

He said it was less the size of the hike that took markets by surprise, but more the central bank’s comment that future rate decisions will be data-dependent. That appeared to suggest a pause in the pace of interest rate hikes, and marked a major change from other announcements this year that have indicated rate increases will continue.

“I think that was a surprise, because (BoC governor) Tiff Macklem has been consistently hawkish throughout this year,” Marshall said. “So you saw that sharp upward movement on the TSX this morning.”

However, Marshall said over the course of the day, investors appeared to come to grips with the more sobering reality that interest rates will remain high for some time. As a result, the morning’s rally dissipated quickly.

“Rates are likely to remain on hold for several quarters, possibly even right through 2023,” Marshall said.

“So I think there’s some optimism about rate cuts, but I think realistically the markets are figuring out it could be several quarters, if not even a year, before we see actual rate cuts.”

In October, the annual inflation rate was 6.9 per cent, well above the Bank of Canada’s two per cent target. Market watchers will be waiting for Statistics Canada’s latest inflation reading on Dec. 21 to see how that has evolved.

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They’ll also be watching for the next round of retail sales figures and employment data to get a sense of the health of the overall economy. Marshall said bond yield curves remain sharply inverted, a potential signal of looming recession.

“We’re of the mind that the probability of recession is increasing, but it’s not a certainty for 2023,” he said.

In New York, the Dow Jones industrial average was up 1.58 points at 33,597.92. The S&P 500 index was down 7.34 points at 3,933.92, while the Nasdaq composite was down 56.34 points at 10,958.55.

The Canadian dollar traded for 73.31 cents US compared with 73.27 cents US on Tuesday.

Oil continued its slide Wednesday, driven down by general unease about the health of the global economy. Benchmark West Texas Intermediate now sits about US$3 below where it was at the start of 2022, prior to the war in Ukraine which sent prices spiking over the spring and summer.

The January crude oil contract was down US$2.24 at US$72.01 per barrel and the January natural gas contract was up 25 cents at US$5.72 per mmBTU.

The February gold contract was up US$15.60 at US$1,798 an ounce and the March copper contract was up four cents at US$3.86 a pound.

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