The S&P 500 and S&P/TSX Composite Index ended a choppy session slightly lower on Wednesday after minutes from the last Federal Reserve meeting showed policymakers agreed they needed to maintain a more restrictive policy stance.
The September meeting minutes also showed many Fed officials stressed the cost of not doing enough to bring down inflation.
Recent market weakness has been tied in part to increasing fears among investors that aggressive rate hikes by the Fed could tip the world’s largest economy into a recession.
Fed officials in recent speeches have come out “in unison regarding the Fed’s commitment toward curtailing inflation and staying the course,” said Quincy Krosby, chief global strategist at LPL Financial in Charlotte, North Carolina.
“There’s an understanding now the Fed is going to keep going. The question for the market is where is the transition from 75 basis points to 50 and 25. That is what the market is focused on I think.”
At the September meeting, Fed officials raised interest rates by three-quarters of a percentage point for the third straight time in an effort to drive inflation down from 40-year highs.
The market bounced around just after the open, with data earlier showing a surprise rise in September producer prices in the U.S. The Labor Department’s producer prices index rose 8.5% in the 12 months through September, slightly higher than an estimated 8.4% rise. Still, the reading was lower than an 8.7% increase in August.
Thursday’s report on U.S. consumer prices is considered even more key and has been anxiously awaited by investors, along with the start of third-quarter U.S. earnings, which kick off with results from some of the big U.S. banks on Friday.
The TSX closed down 10.40 points, or 0.06%, at 18,206.28 - its lowest point since March 2021. Performance was mixed across sectors, with a 1.5% rise in consumer staples a bright spot. The Toronto market’s utilities sector fell 2.5%, extending recent declines.
The energy sector held relatively steady, despite oil falling for a third day, settling 2.3% lower at $87.27 a barrel. A stronger U.S. dollar and worries about weaker demand offset supply concerns.
Cameco Corp was one of the biggest single decliners, falling 13.5%, after the company and Brookfield Renewable Partners said on Tuesday they would acquire nuclear power plant equipment maker Westinghouse Electric in a $7.9-billion deal including debt, amid renewed interest in nuclear energy.
The Dow Jones Industrial Average fell 28.34 points, or 0.1%, to 29,210.85, the S&P 500 lost 11.81 points, or 0.33%, to 3,577.03 and the Nasdaq Composite dropped 9.09 points, or 0.09%, to 10,417.10. Rate-sensitive utilities were down 3.4% while real estate fell 1.4%. They led percentage declines among S&P 500 sectors for the day. The S&P 500 financial index ended down 0.3%.
In credit markets, U.S. Treasury yields initially edged higher after the producer price index reading, but they then turned lower after the release of the Fed’s minutes.
By late day, the two-year Treasury yield, which typically moves in step with interest rate expectations, was down 2.1 basis points to 4.295%, while the 10-year’s yield was off 2.4 basis points to 3.915%. Canadian government bond yields were lower across the curve, tracking the move in U.S. Treasuries. The 10-year eased 4.7 basis points to 3.432%, pulling back from its highest level since June 16 earlier in the session at 3.536%.
The Fed minutes said several policymakers observed that “it would be important to calibrate the pace of further policy tightening with the aim of mitigating the risk,” a view the market took as dovish, said Edwin Moya, senior market analyst for the Americas at OANDA.
“It will be hard for the Fed to remain aggressive with tightening as the economic deteriorates quickly,” Moya said in a note to investors. “The Fed is giving us subtle dovish hints here and that is good news for risky assets.”
Money markets are pricing in a 92% probability that Fed policymakers will hike rates by 75 basis points for the fourth straight time when they meet on Nov. 1-2. Another hike of at least 50 basis points in December also is expected to bring the Fed’s policy rate to 4.25% to 4.50% by the end of 2022.
But investors fear the Fed’s policy tightening, its most aggressive in decades, could jolt the economy into a recession, as the inverted Treasury yield curve has indicated for months.
The difference between yields on two- and 10-year notes, seen as a recession harbinger, was at -38.2 basis points. While still inverted, it has eased from a reading of -57.80 on Sept. 22.
Among gainers on Wall Street, PepsiCo Inc rose 4.2% after the soft-drinks maker raised its annual revenue and profit forecasts on firm demand for its sodas and snacks despite multiple price increases.
Alcoa Corp jumped 5.3%. The Biden administration is weighing restricting imports of Russian aluminum as it charts possible responses to Moscow’s military escalation in Ukraine, a person briefed on the conversations told Reuters.
Declining issues outnumbered advancing ones on the NYSE by a 1.64-to-1 ratio; on Nasdaq, a 1.15-to-1 ratio favored decliners. The S&P 500 posted no new 52-week highs and 78 new lows; the Nasdaq Composite recorded 20 new highs and 433 new lows. Volume on U.S. exchanges was 10.01 billion shares, compared with the 11.68 billion average for the full session over the last 20 trading days.
Reuters, Globe staff
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