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U.S. and Canadian stocks ended sharply lower on Wednesday, as comments from Fed Chair Jerome Powell shattered initial optimism over a Fed policy statement that raised interest rates by 75 basis points but signaled that smaller rate hikes may be on the horizon.

In a volatile trading session, equities initially moved higher in the wake of the hike by the Fed, the fourth straight increase from the central bank of that magnitude as it attempts to bring down stubbornly high inflation.

The target federal funds rate was set in a range between 3.75% and 4.00%, but the impact of the hike was initially tempered by new language that suggested the central bank was mindful of the effect its outsized rate hikes have had on the economy.

Investors had been widely anticipating a 75-basis point rate hike, while hoping the Fed would signal a willingness to begin downsizing the rate hikes at its December meeting.

However, comments from Fed Chair Jerome Powell that it was “very premature” to be thinking about pausing rate hikes sent stocks sharply lower.

“At the end of the day, the markets like certainty and they don’t have certainty from the Fed,” said Ryan Grabinski, managing director of investment strategy at Strategas, a Baird company.

After a strong rally in October that saw the Dow Industrials post their biggest monthly percentage gain since 1976 and the S&P rally about 8%, the three major indexes on Wall Street have no fallen for three straight sessions. Wednesday’s decline was the largest percentage drop for the S&P 500 since October 7.

The S&P 500 had been modestly lower prior to the policy announcement, as an ADP National Employment report showed U.S. private payrolls increased more than expected in October, giving more reason to the Fed to continue an aggressive path of rate hikes.

The private payrolls report came on the heels of data on Tuesday that showed a jump in U.S. monthly job openings, indicating labour demand remained strong.

Investors will get more looks at the labour market in the form of weekly initial jobless claims on Thursday and the October payrolls report on Friday that will help drive expectations for interest rate hikes.

The Dow Jones Industrial Average fell 505.44 points, or 1.55%, to 32,147.76, the S&P 500 lost 96.41 points, or 2.50%, to 3,759.69 and the Nasdaq Composite dropped 366.05 points, or 3.36%, to 10,524.80.

The Toronto Stock Exchange’s S&P/TSX composite index ended down 240.70 points, or 1.2%, at 19,277.01, its biggest decline since Oct. 14. On Tuesday, the index posted its highest closing level in more than six weeks.

The Toronto market’s materials group, which includes precious and base metals miners and fertilizer companies, lost 4.3% as gold and copper prices fell. It included a decline of 17.8% for Ero Copper Corp after the copper miner’s third-quarter profit missed analysts’ estimates.

Shares of Canada Goose Holdings Inc ended 9.1% lower after the luxury parka maker cut its full-year revenue and profit forecast, with persistent COVID-related lockdowns and store closures in China hurting its business.

The consumer discretionary sector fell 1.7%, while technology was down 2.4%.

Credit markets Wednesday also saw a knee-jerk reaction. Bond yields fell, but turned higher after Powell said the Fed has a long way to go before it will consider pausing rate increases.

U.S. 10-year yields were 4 bps higher on the day at 4.09% in late-day trading after their initial steep decline.

“The tone of Fed Chair Jay Powell’s comments was quite hawkish, which means the Fed still has a way to go to fight inflation, and the level of interest rates will be higher than previously expected,” said Jack McIntyre, portfolio manager, Brandywine Global, in an email.

“There were no hints of dovishness to indicate the Fed may be poised to pause.”

The U.S. two-year/10-year yield curve deepened its inversion to -53.70 basis points, not far from its most inverted level seen in 22 years, which happened a few weeks ago. An inverted yield curve typically foreshadows recession.

Canadian government bond yields rose across the curve, tracking the move in U.S. Treasuries. The 10-year was up 9.4 basis points at 3.337%.

Reuters, Globe staff

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