Hot U.S. inflation numbers sink North American stock markets ahead of Fed meeting

In this photo provided by the New York Stock Exchange, trader John Romolo works on the floor, Friday, Feb. 25, 2022. (Courtney Crow/New York Stock Exchange via AP)

TORONTO -

Higher-than-expected U.S. inflation prompted a selloff across North American stock markets as investors fear the Federal Reserve will hike interest rates even more aggressively and push the economy into recession.

“Inflation came in hotter than expected and everything just went straight down from there,” said Allan Small, senior investment adviser at IA Private Wealth.

The U.S. consumer price index surged 8.6 per cent on an annual basis in May for the biggest increase in 40 years.

That pushed the S&P/TSX composite down 289.07 points or 1.4 per cent to 20,274.82 It snapped a three-week winning streak to end the week off 2.5 per cent.

U.S. markets dropped harder with the Dow Jones industrial average losing 880.00 points at 31,392.79. The S&P 500 index was down 116.96 points at 3,900.86, while the Nasdaq composite was down 414.21 points or 3.5 per cent at 11,340.02.

On the week, American markets were down between 4.6 and 5.6 per cent.

Consumer confidence numbers that also came out Friday were one of the lowest recorded as “everyone right now is in panic mode,” Small said in an interview.

He said what keeps him up at night is the Fed raising interest rates too much and too fast.

“It's a fear in this market the Fed is going to raise rates so much, slow down this economy so much that it could take us into a recession.”

Markets were already anticipating the central bank would increase rates by half a percentage point next week and then again in the subsequent meeting.

But now, he says a 75 basis point increase is on the table with some people calling for a 100 basis point increase. Alternatively, instead of two hikes of 50 basis points, the Fed might stretch those increases to four meetings before taking a pause at the end of the year.

Small said the economy is slowing and turning that around after raising interest rates will be very difficult to do.

“So it's just very frustrating and the market is showing its frustration.”

Although the reaction to U.S. inflation spilled over into Canada, he said Canada's strong employment numbers for May had little effect on markets or the loonie. But Small said it gives Bank of Canada governor Tiff Macklem more ammunition to raise rates again.

Nearly 40,000 net jobs were added last month as the unemployment rate fell to a record low of 5.1 per cent.

Materials was the lone sector on the TSX to be up on the day. It gained nearly two per cent as the price of gold rose in reaction to the inflation number. Several miners, led by Fortuna Silver Mines Inc. and Endeavour Silver Corp., each increased 8.8 per cent Friday.

The August gold contract was up US$22.70 at US$1,875.50 an ounce and the July copper contract was down 8.7 cents at US$4.29 a pound.

Health care and technology were the biggest laggards as five of 10 sectors dropped by more than two per cent.

Technology lost 3.4 per cent as the 10-year U.S. treasury bond yield increased to 3.165 per cent and the 10-year Canadian government bond yield rose to 3.347 per cent. Two-year treasuries moved above three per cent to its highest level since late 2007.

Shopify Inc. led the sector lower, falling 5.7 per cent, followed by Lightspeed Commerce Inc. which dropped 5.4 per cent.

The heavyweight financials sector decreased 2.1 per cent while consumer discretionary and real estate were off 3.0 and 2.3 per cent, respectively.

Energy fell 1.7 per cent as crude oil prices slipped on the day but was up for the week.

The July crude contract was down 84 cents at US$120.67 per barrel and the July natural gas contract was down 11.3 cents at US$8.85 per mmBTU.

Headwater Exploration Inc. lost 3.5 per cent while Vermilion Energy Inc. was down 3.3 per cent.

Small said high oil and gasoline prices will destroy demand as people forego summer travel plans.

The Canadian dollar traded for 78.27 cents US compared with 79.09 cents US on Thursday.

This report by The Canadian Press was first published June 10, 2022.