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The TSX, Dow and the S&P 500 advanced on Thursday as U.S. bank shares rallied after major lenders cleared the Federal Reserve’s annual stress test, while strong economic data stoked expectations of further interest rate hikes from the central bank.

The stronger-than-expected economic data in the U.S. pushed Treasury yields higher and steered investors toward economically sensitive sectors as recession fears eased. But buyers shied away from some rate-sensitive growth sectors due to concerns the Fed would keep interest rates higher for longer.

After a health check showed that the biggest U.S. banks have enough capital to weather a severe economic slump the S&P 500 banks index closed up 2.6%. The relief rally also helped advance the KBW Regional Banking index by 1.8%.

Data showed an unexpected weekly decline in the number of Americans filing new claims for unemployment benefits, and the U.S. GDP increased at a 2.0% annualized rate in the first quarter, up from the 1.3% pace reported previously.

“The upside surprise economic data has pushed yields higher today and the move higher has put some downward pressure on technology and growth stock stocks while supporting value and cyclical parts of the market,” said Mona Mahajan, senior investment strategist at St. Louis based Edward Jones.

Yields on U.S. two-year, five-year, and 10-year notes hit three-month highs, while a key yield curve deepened its inversion. Canada’s five-year bond yield, closely watched because of its influence on fixed mortgage rates, rose 20 basis points to 3.818% by late afternoon, closing in on the 15-year highs hit earlier this month.

“Broadly, the [U.S.] data was extraordinarily strong and the economy is quite resilient,” said Subadra Rajappa, head of U.S. rates strategy, at Societe Generale in New York.

“This follows hawkishness from central bankers over the last couple of weeks since the last FOMC (Federal Open market Committee) meeting,” she said. “The market is coming to the realization that the Fed may have to do more than what is being priced.”

The U.S. data supported Fed Chair Jerome Powell’s comments on further rate hikes needed to suppress inflation. At a Spanish central bank event in Madrid, Powell signaled on Thursday that more monetary tightening is likely needed amid a fresh slew of stronger-than-expected U.S. economic data.

That came a day after Powell said at a central bank panel in Portugal that the Fed is keeping consecutive U.S. interest rate hikes on the table. At the same event, European Central Bank President Christine Lagarde cemented expectations for a ninth straight rise in euro zone rates in July.

Traders were pricing in a roughly 86.8% chance the Fed would hike interest rates by 25 basis points to the 5.25%-5.50% range at its July meeting, according to CME Group’s Fedwatch tool, up from bets for 81.8% probability a day earlier.

The Fed’s preferred inflation gauge, the Personal Consumption Expenditure index (PCE) for May, will be released on Friday. Economists polled by Reuters expect core rates to remain steady at 4.7%.

The Toronto Stock Exchange’s S&P/TSX composite index ended up 94.32 points, or 0.5%, at 19,913.17, its fourth straight day of gains and its highest closing level since June 19.

“It’s a response to what the broader markets globally have done and the TSX is catching up since it was actually lagging for some time,” said Sid Mokhtari, chief market technician for CIBC Capital Markets.

The TSX has advanced 2.7% since the beginning of the year, while U.S. benchmark the S&P 500, which has a much higher weighting in high-flying tech stocks, has gained 14.5%.

“We are starting to see small green shoots within the energy sector which is yet another potential positive given its weight in the TSX index,” Mokhtari said. “And we are also seeing the U.S. bank sector beginning to show bottom building characteristics which should again be net positive for our sector as well.”

The Toronto market’s heavily-weighted financial sector, which accounts for 29% of the TSX’s market capitalization advanced 0.6%, helped by gains for the six major bank stocks, including Bank of Nova Scotia, which ended 1.4% higher.

The energy sector, which is also heavily weighed, rallied 1% as the price of oil settled 0.4% higher at US$69.86 a barrel.

BlackBerry Ltd was a standout. Its shares jumped 7.4% after the company posted a surprise profit for the first quarter.

The Dow Jones Industrial Average rose 269.76 points, or 0.8%, to 34,122.42, the S&P 500 gained 19.58 points, or 0.45%, to 4,396.44 and the Nasdaq Composite dropped 0.42 points to 13,591.33.

The economically sensitive Russell 2000 index of small-cap stocks rose 1.2% while the cyclical materials index finished up 1.3% and was the second strongest performer among the S&P 500′s 11 sectors behind financials , which gained 1.7% as banks rallied.

The tech-heavy Nasdaq was still on track for a gain of more than 29% in the first half of the year, its biggest such gain in 40 years. On Thursday it managed to pare losses and close barely lower but was under pressure throughout the day from losses in megacaps including Amazon, Meta Platform, Nvidia and Microsoft.

The Philadelphia semiconductor index managed a small 0.13% gain but underpeformed during the session, with a 4% decline in Micron Technology shares leading losses even though the chipmaker beat estimates for third-quarter results.

Occidental Petroleum rose 1.8% after Berkshire Hathaway Inc said it added more shares of the oil firm, boosting its stake to above 25%.

Shares in sportswear maker Nike closed up 0.3% but then fell around 1% after the bell, even though its financial report showed that it beat Wall Street estimates for quarterly revenue with buoyant demand for sneakers such as Air Jordan and LeBron 20.

Advancing issues outnumbered declining ones on the NYSE by a 1.93-to-1 ratio; on Nasdaq, a 1.48-to-1 ratio favored advancers. The S&P 500 posted 44 new 52-week highs and 2 new lows; the Nasdaq Composite recorded 90 new highs and 90 new lows. On U.S. exchanges 9.65 billion shares changed hands compared with the 11.34 billion moving average for the last 20 sessions.

Reuters, Globe staff

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