Wall Street rattled by the prospect of higher-than-expected rates

(New York) The New York Stock Exchange was hit hard on Tuesday by comments from the chairman of the US central bank (Fed) suggesting that the institution’s rates could go higher than expected so far, reigniting fears of a recession.

The Dow Jones plunged 1.72%, the NASDAQ 1.25% and the broader S&P 500 index 1.53%.

Fed chief Jerome Powell pointed out that the Fed’s main interest rate, which has been climbing for a year to control inflation, could rise at a faster rate than expected and go beyond the level at which the officials of the institution saw it so far stop, or 5.1%.

And rates could stay high “for a while,” he warned before a Senate committee.

Markets are now overwhelmingly pricing in a rate hike, currently between 4.50% and 4.75%, of 50 basis points at the next meeting of the Fed’s Monetary Policy Committee on March 21-22.

However, a more aggressive Fed on rates, which increases the cost of credit for households and businesses, also increases the risk of recession, which would have an impact on corporate profits.

The New York Stock Exchange indices immediately took a nosedive.

Following Fed rate expectations, the yield on 2-year US government bonds jumped to its highest level since 2007, above the 5% threshold.

The 10-year rate also tightened, briefly returning above the 4% threshold.

This has further accentuated the phenomenon known as the inversion of the yield curve, which means that short-term rates are higher than long-term rates, and which is often considered to be a harbinger of an economic recession.

The gap between the US two-year rate and the ten-year rate hasn’t been this wide since 1981.

Maintaining the official line

Quincy Krosby, of LPL Financial, is a little surprised, however, by the reaction of the markets.

“Jerome Powell has only maintained the line he set for himself, namely that the Fed would do what it has to do to restore price stability,” she stressed.

“There are undoubtedly times when the market tends not to believe it or to think that the return to price stability will happen more quickly,” she said.

But Jerome Powell “repeats at will that the policy of the Fed depends on the indicators” and the latest figures on inflation clearly show that work remains to be done, added the specialist.

Ahead of the Fed’s next meeting, two other major inflation reports will be released as well as the much-awaited February jobs report.

In this context, banking stocks were particularly shaken: JPMorgan lost 2.93%, Bank of America 3.20%, Wells Fargo 4.68% and Citi 2.11%.

Among the other values ​​of the day, the airline JetBlue dropped 2.86% after the formalization of a complaint filed by the Ministry of Justice to block the takeover of its rival Spirit (+4.71%) on the grounds that approximation would lead to higher prices for passengers.

The other large companies have risen in stride, American taking 1.49%, Delta 1.59% and United 2.99%.

Electric pickup maker Rivian, struggling to ramp up production, fell 14.54% after announcing plans to put $1.3 billion worth of bonds on the market.

WW International, which offers Weight Watchers slimming diets, soared 79.07% after announcing the acquisition of the company Sequence, which sells online consultations with weight management specialists.

On the Toronto Stock Exchange

The Toronto Stock Exchange retreated more than 1% on Tuesday, weighed down by losses in the energy, metals and financials sectors, while the major US indices also closed lower.

The Toronto floor’s S&P/TSX Composite Index lost 239.26 points to end the day with 20,275.54 points.

The market reacted strongly to comments Federal Reserve Chairman Jerome Powell made in Washington during two-day testimony before a Senate committee, said Kevin Headland, chief investment strategist at Manulife Investment Management. .

Powell said the central bank could increase the size of its rate hikes and lift rates above previously reported levels if data continued to point to a strong economy.

With less optimism than investors may have hoped, equity markets plunged alongside commodities.

“It’s interesting how, once again, the market was expecting, I think, the Federal Reserve not to maintain the same tone from last year, and they’ve been wrong every time,” pointed out Mr. Headland.

“They keep saying they’re fighting inflation. »

Markets were already anticipating two more interest rate hikes from the Fed, but are now starting to price in bigger hikes, Headland said. The March decision is increasingly expected at 50 basis points, while a third hike could also be on the horizon.

That sentiment will only be strengthened if employment data, to be released on Friday, continues to show an exceptionally strong labor market, he warned.

Canada will also receive its new labor market data on Friday, but its latest rate decision will already be past. Observers expect the Bank of Canada to maintain its key interest rate in its announcement on Wednesday.

Canada’s central bank needs to walk a finer line than the Fed, Headland said, because both the economy and consumers there are more sensitive to interest rates.

In the currency market, the Canadian dollar traded at an average rate of 72.90 cents US, down from 73.45 cents US on Monday.

Tuesday’s loonie weakness was due to the strength of the US dollar, as well as stagnant oil prices, Headland said.

While the Federal Reserve is taking a much tougher stance on interest rates than the Bank of Canada, “the spread between two-year yields has widened, and that’s what puts downward pressure on the Canadian dollar,” he said.

On the New York Commodities Exchange, crude oil fell US$2.88 to US$77.58 a barrel, while natural gas rose 12 cents US to US$2.69 on million BTUs.

The price of gold plunged US$34.60 to US$1820.00 an ounce and that of copper depreciated 11 cents US to US$3.98 a pound.

The Canadian Press

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