Aggressive tone from central banks sends TSX to biggest 2-day drop since 2020

TORONTO — Canada’s main stock index suffered its worst two-day slump in nearly two years as a more aggressive tone about interest rate hikes from central banks wreaked havoc across North American markets.

After a good start to the week, sentiment began to shift once U.S. Federal Reserve chairman Jerome Powell addressed an International Monetary Fund gathering on Thursday. It continued downhill Friday once Bank of Canada governor Tiff Macklem adopted a similarly aggressive stance in comments to reporters.

Both leaders insist they’re ready to take action to tackle soaring inflation, just weeks after insisting that inflation was just transitory or temporary.

The changed wording and tone about inflation got markets really worried about future interest rate increases, said Pierre Cleroux, chief economist for the Business Development Bank of Canada.

“Everybody was expecting an increase of interest rates but what we saw over the last two or three days both in Canada and in the U.S. is really the tone has changed. (They’re) much more aggressive in terms of interest rate increases and I think that’s why the market is so nervous,” he said in an interview.

Powell said he wants to restore price stability and vowed to do what has to be done to bring inflation down. He also said he would favour a strategy for stronger front-end rate increases.

“So that signalled that the next increase is going to be significant and we might see more than one significant increase, we might see two or three,” Cleroux said.

That means the upcoming increase on May 3 will likely be 0.5 per cent with the possibility of it being followed by another 0.5 per cent hike at the subsequent meeting.

Although at least one Fed member said the door can’t be closed on a 0.75 per cent rate hike in a couple of weeks, Cleroux doesn’t think that will happen.

“I would be surprised because I think that’s very significant,” he said, noting the first increase was 0.25 per cent.

Cleroux noted that Macklem also said he’s ready to take the necessary steps to reduce inflation and wouldn’t rule out going over 0.50 per cent if that is required.

The S&P/TSX composite index closed down 464.03 points or 2.1 per cent to 21,186.38. That’s the worst single day performance since November.

The Toronto market lost 4.9 per cent over two days, the biggest decrease since June 2020.

U.S. markets also suffered steep declines.

In New York, the Dow Jones industrial average had its worst day since 2020 by decreasing 981.36 points or 2.8 per cent to 33,811.40. The S&P 500 index was down 121.88 points at 4,271.78, while the Nasdaq composite was down 335.36 points at 12,839.29.

Once again, the TSX was a sea of red with all 11 major sectors losing ground, with nine falling by more than one percentage point. Of those, five dropped by more than 2.3 per cent.

The common theme was that investors fear an overly rapid increase in interest rates could slow the economy, possibly into a recession.

“Obviously the central banks don’t want to do that but by increasing interest rates very rapidly you don’t see the impact before six or eight months so this is a very difficult game to play,” said Cleroux.

Consumer discretionary, materials, financials and technology were the weakest performers.

Canada Goose Holdings Inc. fell 6.6 per cent to push the consumer sector lower while the heavyweight financials dropped 2.6 per cent with Royal Bank of Canada shedding 4.2 per cent in heavy trading.

The sector that includes miners, fertilizer companies and forest products producers decreased 2.6 per cent on a drop in metals prices. First Quantum Minerals Ltd. was down 9.1 per cent.

The June gold contract was down US$13.90 at US$1,934.30 an ounce and the May copper contract was down 12.3 cents at US$4.58 a pound.

Technology continued its downward trend, falling 2.5 per cent as shares of Hut 8 Mining Corp. decreased 4.4 per cent and Shopify Inc. lost another 3.2 per cent.

Energy dropped 1.9 per cent with Crescent Point Energy Corp. decreasing 4.9 per cent on a drop in crude oil and natural gas prices.

The June crude contract was down US$1.72 at US$102.07 per barrel and the June natural gas contract was down 43.3 cents at US$6.66 per mmBTU.

The Canadian dollar lost more than one cent to trade for 78.73 cents US, compared with 79.81 cents US on Thursday.

by The Canadian Press