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Wall Street’s main indexes ended a seesaw session higher on Monday, as investors turned their attention to this week’s policy meeting at the Federal Reserve and how aggressively it will hike interest rates. Toronto’s main stock also rose as energy and materials shares rallied ahead of the release of domestic inflation data.

Even more so than the Ukraine war or corporate earnings, the actions of the U.S. central bank are driving market sentiment as traders try to position themselves for a rising interest rate environment.

The S&P 500 and the Nasdaq rebounded from logging their worst weekly percentage drop since June on Friday, as markets fully priced in at least a 75 basis point rise in rates at the end of Fed’s Sept. 20-21 policy meeting, with Fed funds futures showing a 15% chance of a whopping 100 basis point increase.

Unexpectedly hot August inflation data last week also raised bets on increased rate hikes down the road, with the terminal rate for U.S. fed funds now at 4.46%.

“This is all about what’s going to happen on Wednesday, and what comes out of the Fed’s hands on Wednesday, so I think people are just going to wait and see until then,” said Josh Markman, partner at Bel Air Investment Advisors.

“We had a poor print when the CPI came in, so the Fed - who is behind the 8-ball - is now trying to get ahead of the curve and curb inflation, and that (awareness) is driving equity markets.”

Reflecting the caution for new bets ahead of the Fed meeting, just 9.58 million shares traded on U.S. exchanges on Monday, the sixth lightest day for trading volume this year.

Focus will also be on new economic projections, due to be published alongside the Fed’s policy statement at 2 p.m. ET on Wednesday.

Worries of Fed tightening have dragged the S&P 500 down 18.2% this year, with a recent dire earnings report from delivery firm FedEx Corp, an inverted U.S. Treasury yield curve and warnings from the World Bank and the IMF about an impending global economic slowdown adding to the woes.

Goldman Sachs cut its forecast for 2023 U.S. GDP late on Friday as it projects a more aggressive Fed and sees that pushing the jobless rate higher than it previously expected.

The benchmark 10-year U.S. Treasury yield hit its highest in over a decade on Monday and the U.S. dollar strengthened as traders braced for the Fed move this week. The 10-year’s yield shot to 3.518%, its highest since April 2011, before backing off.

The Canadian 10-year bond yield reached as high as 3.215%, still below peak levels from late spring.

The Toronto Stock Exchange’s S&P/TSX composite index ended up 0.9%, or 176.50 points, at 19,562.38, after posting on Friday its lowest closing level since Sept. 7.

Canadian inflation data, due on Tuesday, could help guide expectations for additional interest rate hikes by the Bank of Canada.

“The markets reacted negative to U.S. CPI so hopefully that de-risks the potential volatility from the Canadian release,” said Angelo Kourkafas, investment strategist at Edward Jones Investments. “We are looking at interest rate expectations which have moved higher, so we don’t expect it to be much of a negative catalyst for the markets given what transpired last week.”

The TSX materials sector, which includes precious and base metals miners and fertilizer companies, added 2.5%. It was led by gold miner Kinross Gold Corp, which gained 10.8% after the company announced a $300-million share buyback plan.

The energy sector advanced 0.7% as oil prices settled 0.7% higher at $85.73 a barrel. Traders balanced fears that global demand could slow with worries about tight supplies.

Heavily weighted financials also rose 0.7%, while industrials ended up 0.9%.

The Dow Jones Industrial Average rose 197.26 points, or 0.64%, to 31,019.68, the S&P 500 gained 26.56 points, or 0.69%, to 3,899.89 and the Nasdaq Composite added 86.62 points, or 0.76%, to 11,535.02.

A majority of the 11 S&P 500 sectors rose. One exception was healthcare, down 0.6% as it was weighed by a fall in shares of vaccine maker Moderna Inc a day after President Joe Biden said in a CBS interview that “the pandemic is over”.

Industrial stocks rebounded 1.4% after a sharp drop on Friday, while banks gained 1.9%. Tech heavyweights Apple Inc and Tesla Inc rose 2.5% and 1.9%, respectively, to provide the biggest boost to the S&P 500 and the Nasdaq.

Take-Two Interactive Software Inc closed up 0.7%, having recovered from a slump earlier in the day caused by confirmation that a hacker had leaked the early footage of Grand Theft Auto VI, the next installment of the best-selling videogame.

Meanwhile, Knowbe4 Inc jumped 28.2% to $22.17, its highest close since May 4, after the cybersecurity firm said that Vista Equity Partners had offered to take it private for $24 per share, valuing the company at $4.22 billion.

The S&P 500 posted one new 52-week high and 28 new lows; the Nasdaq Composite recorded 29 new highs and 378 new lows.

Reuters, Globe staff

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