TSX closes lower as bank holds rate, U.S. markets fall on inflation report

TORONTO — Losses in financial and utilities stocks helped drag Canada’s main stock index down more than 160 points, while U.S. stock markets also fell after the latest inflation report forced market watchers to push back interest-rate-cut expectations.

Inflation in the U.S. last month was hotter than economists expected. It’s the latest stronger-than-expected inflation report as the U.S. Federal Reserve is waiting for more evidence that price growth is sustainably on its way down.

“It really complicates the picture for the Fed on the initiation of this easing cycle,” said Tamsin Wilding, principal and portfolio manager of fixed income at Leith Wheeler Investment Counsel Ltd.

Having already pared back expectations for rate cuts this year to three, on Wednesday, markets brought them further back, weighing the possibility that 2024 could bring only one or two cuts from the Fed. The central bank’s most recent projection was that it would cut three times this year.

June is off the table for a rate cut, and July is uncertain too, said Wilding. After July, the next decision date for the Fed isn’t until September.

Equities took the news that rates could be higher for longer hard, with the Dow losing more than one per cent.

“It’s a headwind, for sure,” said Wilding.

In New York, the Dow Jones industrial average was down 422.16 points at 38,461.51. The S&P 500 index was down 49.27 points at 5,160.64, while the Nasdaq composite was down 136.28 points at 16,170.36.

The S&P/TSX composite index closed down 162.65 points at 22,199.13.

Meanwhile, the Bank of Canada again held its key rate steady but governor Tiff Macklem said a cut in June is possible.

“I realize that what most Canadians want to know is, when we will lower our policy interest rate. What do we need to see to be convinced it’s time to cut?” Macklem said.

“The short answer is, we are seeing what we need to see but we need to see it for longer to be confident that progress toward price stability will be sustained.”

The gap between the two central banks’ monetary policies widened, said Wilding, as it becomes increasingly clear that the Bank of Canada could start cutting rates several months earlier than the Fed.

That’s a direct reflection of the differences in the two countries’ mortgage markets, with significantly shorter mortgage periods in Canada meaning consumers have felt the impact of rate hikes much more acutely, said Wilding.

“That enables the Bank of Canada to move back to a more neutral setting earlier,” she said.

But the Bank of Canada hasn’t really signalled what the timing and magnitude of rate cuts might look like, added Wilding.

“I think it would be a cautious easing to begin with as they monitor both the data but also … any spillover from what the Fed is doing,” she said.

The Canadian dollar traded for 73.15 cents US compared with 73.65 cents US on Tuesday.

The May crude oil contract was up 98 cents at $86.21 US per barrel and the May natural gas contract was up two cents at $1.89 US per mmBTU.

The June gold contract was down $14 US at $2,348.40 US an ounce and the May copper contract was down a penny at $4.28 US a pound.