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Major North American stock indexes ended sharply lower on Tuesday as U.S. economic data underscored the view the Federal Reserve may need to keep interest rates high, sending bond yields to fresh 16-year highs.

Data showed U.S. job openings unexpectedly increased in August, fueling worries about a tight labour market ahead of Friday’s key U.S. monthly jobs report.

“The scenario that most investors were assuming is the Fed would need to ultimately cut short-term rates, and we would return to a favourable interest rate environment,” said Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey. “But investors are seeing a different scenario now - higher rates for longer.”

Yields on benchmark U.S. 10-year notes reached 4.806%, up more than 10 basis points.

Government of Canada bond yields rose more dramatically, as investors played catch-up with moves in U.S. Treasuries after the Canadian market was closed on Monday for a holiday. The 10-year was fetching 4.318% by late afternoon, up about 28 basis points for the day. The five-year bond was up 22 basis points.

With the 10-year at its highest since 2007, “it’s hard to believe that’s a full percentage point higher than on Canada Day, just three short months ago,” Sal Guatieri, senior economist for BMO Capital Markets, said in a note.

Robert Kavcic, also a senior economist at BMO, noted the Canada five-year yield is now threatening to break above levels of 2007. “Beyond that we’re encroaching on late-90s/early-2000s territory. Suffice it to say that, despite the BoC’s pause, the mortgage-rates screws have actually tightened significantly,” he said. The five-year bond yield is indicative of where fixed mortgage rates are heading.

Canadian businesses have made larger and more frequent price changes since the pandemic, passing on higher costs to consumers, and that behavior could stoke inflation, Bank of Canada Deputy Governor Nicolas Vincent said on Tuesday.

Vincent’s comments helped underpin Canadian bond yields, said Amo Sahota, director at Klarity FX in San Francisco, adding that the market is “still gunning for another rate hike” from the Canadian central bank.

Money markets see a 64% chance that the BoC will tighten further by the end of the year. The benchmark rate was lifted in July to a 22-year high of 5%.

The Toronto Stock Exchange’s S&P/TSX composite index ended down 156.26 points, or 0.8%, at 19,020.92, its lowest closing level since October 2022.

The real estate sector, which is particularly sensitive to higher interest rates, lost 1.9%, while technology was down 1.7%, pressured by a 4.6% decline in the shares of e-commerce company Shopify Inc.

The materials sector, which includes precious and base metals miners and fertilizer companies, fell 0.9% as gold hit a seven-month low.

Shares of Lundin Mining fell 5.2% as the company announced that insider Jack Lundin would be the new chief executive officer.

Financials dropped 1.5%. The TSX energy sector rose 0.2% as the price of oil rebounded from a three-week low. U.S. crude oil futures were up 0.8% at $89.57 a barrel.

The Dow Jones Industrial Average fell 430.97 points, or 1.29%, to 33,002.38, the S&P 500 lost 58.94 points, or 1.37%, at 4,229.45 and the Nasdaq Composite dropped 248.31 points, or 1.87%, to 13,059.47.

All but one S&P 500 sector - utilities - were lower on the day, led by declines in consumer discretionary and technology. Growth companies tend to be among the hardest hit by rising yields.

The CBOE volatility index, Wall Street’s “fear gauge,” hit its highest close since May 24.

Atlanta Fed President Raphael Bostic said there is no urgency for the central bank to raise its policy rate again, but it will likely be “a long time” before rate cuts are appropriate. Cleveland Fed President Loretta Mester said she is open to raising rates again, potentially at the bank’s next meeting.

Shares of and Microsoft dropped after Reuters reported British media regulator Ofcom will push for an antitrust investigation into the companies’ dominance of the UK cloud computing market.

Investors are getting ready for U.S. companies in the coming weeks to begin reporting on the last quarter, with some hoping the results could provide some positive news again for the market.

While the Dow is down 0.4% for the year, the Nasdaq remains up about 25% since Dec. 31 after a rally driven by enthusiasm over artificial intelligence.

Volume on U.S. exchanges was 11.16 billion shares, compared with the 10.57 billion average for the full session over the last 20 trading days. Declining issues outnumbered advancers on the NYSE by a 5.61-to-1 ratio; on Nasdaq, a 3.52-to-1 ratio favored decliners. The S&P 500 posted one new 52-week high and 63 new lows; the Nasdaq Composite recorded 15 new highs and 439 new lows.

Reuters, Globe staff

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