The Dow and the S&P 500 rose slightly on Wednesday after October data showed U.S. consumer prices rising in line with expectations, adding support to bets that the U.S. Federal Reserve will cut interest rates in December.
The TSX outperformed Wall Street, rising about 0.2% to a fresh record high. But that came amid the Canadian dollar sinking to a four-year low and money market bets swinging in favour of the Bank of Canada implementing a more modest cut in interest rates next month.
The consumer price index (CPI) rose 0.2% in October for the fourth straight month and advanced 2.6% on an annual basis, the Labor Department’s Bureau of Labor Statistics said. Excluding the volatile food and energy components, the CPI increased 0.3% in October, meeting economists’ forecasts.
After the report, traders’ bets reflected a more than 82% probability for a 25 basis-point interest rate cut at the Fed’s December meeting, up from 58.7% on Monday, according to CME group’s FedWatch tool.
While some Fed officials sounded more cautious on Wednesday, Minneapolis Fed President Neel Kashkari told Bloomberg TV that he was confident inflation was headed down, noting that the CPI data “confirms” that downward path.
Still, Dallas Federal Reserve President Lorie Logan said the U.S. central bank should proceed cautiously on further interest rate cuts to keep from inadvertently re-igniting inflation.
“There’s some relief inflation didn’t come in ahead of expectations. That was a concern coming into today’s CPI report,” said Angelo Kourkafas, senior investment strategist at Edward Jones. “The fact we got a right-in-line number helped alleviate some of those fears. Nothing we saw today from today’s data argues against a December rate cut.”
Reflecting December rate cut bets, U.S. Treasury 2-year yields fell sharply after the inflation report.
However, the benchmark U.S. 10-year yield regained ground after the data and rose as high as 4.46% as investors focused on longer-term expectations that President-elect Donald Trump’s policies could exacerbate inflation. Canadian bond yields were higher across the curve.
As of late Wednesday, implied probabilities in overnight swaps markets suggested a 61% chance of a 25 basis point Bank of Canada cut at its next meeting on Dec. 11, and 39% odds of a larger 50 basis point cut, according to LSEG data. That’s the inverse of where they stood earlier this week.
A large rate cut in Canada would put the Canadian dollar under further pressure, as it would encourage money flows into higher-yielding U.S. Treasuries. As of Wednesday, the Canadian 10-year bond was yielding 110 basis points below that of the U.S. 10 year bond - an unusually large spread.
“For the past 20 years, the correlation between Treasuries and GoC yields has been 0.95 or higher — but the divergence since early October has been staggering,” BMO Capital Markets economist Douglas Porter said in a note Wednesday. “The concerns over upside risk for U.S. inflation and budget deficits just don’t translate into Canada, where the concern is now over the potential hit to growth from trade uncertainty. While we suspect many of these concerns may be a bit overdone, the yawning and record gap in long-term yields could continue for some time yet until there is more policy clarity.”
The loonie fell about two-tenths of a cent to 71.41 cents US.
The Dow Jones Industrial Average rose 47.21 points, or 0.11%, to 43,958.19, the S&P 500 gained 1.39 points, or 0.02%, to 5,985.38 and the Nasdaq Composite lost 50.66 points, or 0.26%, to 19,230.74.
Investors are expecting a pro-business stance and possible tax cuts from the next administration.
Wednesday’s projections that the Republican Party had won a majority in the House of Representatives suggested that it could be easier for Trump to push through his policies, according to Sahak Manuelian, managing director and head of equity trading at Wedbush Securities. While Venu Krishna, head of U.S. equity strategy and global equity-linked strategies at Barclays, sees upside momentum for risk assets, he said the market is contending with rates, inflation and valuations that “are bigger headwinds now than they were in 2016, the last time Trump became president.”
The S&P/TSX composite index ended up 66.01 points, or 0.3%, at 24,989.02, eclipsing the record closing high it posted on Tuesday.
The Toronto market’s technology sector rose 2.4% as Shopify added to the previous day’s sharp gains.
Shares of Suncor advanced 4.2% after the company reported much better-than-expected third-quarter results. That helped lift the energy sector, which ended up 0.8%. U.S. crude oil futures settled 0.5% higher at US$68.43 a barrel, helped by short-covering.
CAE was a standout. Shares of the civil aviation training company climbed 11.9% after quarterly results beat estimates.
The materials group was among the sectors that lost ground. It fell 1.3% as gold and copper prices declined, while consumer staples were down 0.7%.
Loblaw Companies shares fell 2.4% after the retailer missed third-quarter revenue estimates, hurt by a slowdown in demand.
In individual shares in the U.S., Spirit Airlines’ shares plunged 59% on Wednesday after a report the U.S. carrier was preparing to file for bankruptcy protection, while the company said it was talking with creditors.
Shares of Rivian soared 13.7% after Volkswagen on Tuesday raised its investment in the EV maker.
Declining issues outnumbered advancers by a 1.41-to-1 ratio on the NYSE where there were 371 new highs and 113 new lows.
On the Nasdaq, 1,459 stocks rose and 2,839 fell as declining issues outnumbered advancers by a 1.95-to-1 ratio. The S&P 500 posted 58 new 52-week highs and 15 new lows while the Nasdaq Composite recorded 201 new highs and 165 new lows.
On U.S. exchanges 16.49 billion shares changed hands compared with the 13.46 billion average for the last 20 sessions.
Globe staff, Reuters