Canadian and U.S. stock indexes ended sharply lower on Thursday in a broad sell-off after data showing a strong U.S. labour market boosted bond yields and fanned fears the Federal Reserve will be aggressive in raising interest rates.
The S&P/TSX Composite Index logged its biggest single-day fall since since March 15. The S&P 500 posted its biggest daily percentage drop since May 23.
Canada’s five-year government bond yield - influential on the setting of fixed mortgage rates and longer-term guaranteed investment certificates - spiked more than 13 basis points to its highest in more than 15 years. The benchmark U.S. 10-year yield burst above 4% while the two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, hit a 16-year high.
Private U.S. payrolls surged far more than expected in June, data showed, suggesting the labour market remained solid despite growing risks of a recession. A separate report showed U.S. job openings dropped in May, but remained at elevated levels.
A day before the monthly U.S employment report, evidence of a solid labour market spurred expectations the Fed will keep interest rates higher for longer to tame stubborn inflation.
“We don’t see any softening in the labour market,” said Brad McMillan, chief investment officer for Commonwealth Financial Network. “The Fed doesn’t have to worry about the jobs market. When you look at their mandate, they have no reason not to keep hiking and to keep hiking for a while.”
U.S. interest rate futures are now pricing in a 92% chance of another rate hike by the Federal Reserve on July 26, according to CME’s FedWatch.
The Fed did not hike rates in June. Dallas Fed President Lorie Logan on Thursday said there was a case for a rate rise at the June policy meeting.
Toronto’s S&P/TSX composite index ended down 293.20 points, or 1.5%, to 19,810.69.
All 10 major sectors ended lower. Rate-sensitive technology stocks lost 1.9%, energy fell nearly 2% and heavily weighted financials were down 1.6%.
The move lower came as data showed Canada recorded a surprise trade deficit in May.
Canada’s employment report for June is also set for release on Friday. The data could help guide expectations for next Wednesday’s policy decision by the Bank of Canada.
Swaps markets Thursday priced in 56% odds that the bank will hike interest rates by another quarter percentage point. A majority of economists in a Reuters poll released Thursday predicted there will be further monetary tightening next week.
Aritzia Inc was among the biggest decliners on Thursday. Its shares fell 5.8% after BofA Global Research downgraded the apparel and accessories retailer to “underperform” from “neutral.”
The Dow Jones Industrial Average fell 366.38 points, or 1.07%, to 33,922.26, the S&P 500 lost 35.23 points, or 0.79%, to 4,411.59 and the Nasdaq Composite dropped 112.61 points, or 0.82%, to 13,679.04.
All 11 S&P 500 sectors ended down. Energy led declines among the sectors, dropping about 2.5%, while consumer discretionary slumped nearly 1.7%.
Gains in megacap stocks mitigated declines for the major indexes, which ended above their session lows. Microsoft rose 0.9% while Apple was up 0.3%.
In company news, Exxon Mobil Corp shares fell 3.7% after the oil major signaled a sharp fall in second-quarter operating profits on lower natural gas prices and weaker oil refining margins.
Second-quarter corporate reports will arrive in coming weeks with S&P 500 earnings expected to fall 5.7% from a year-ago, according to Refinitiv data.
“You have a situation where rates are going higher, profits are not really moving,” said King Lip, chief strategist at Baker Avenue Wealth Management. “That’s usually not a good combination for stocks.”
JetBlue Airways shares dropped 7.2% a day after the company said it would follow a U.S. judge’s May order to end its alliance with American Airlines to protect a planned purchase of Spirit Airlines.
Declining issues outnumbered advancing ones on the NYSE by a 6.01-to-1 ratio; on Nasdaq, a 3.25-to-1 ratio favored decliners. The S&P 500 posted 4 new 52-week highs and 2 new lows; the Nasdaq Composite recorded 27 new highs and 118 new lows. About 11.7 billion shares changed hands in U.S. exchanges, compared with the 11.1 billion daily average over the last 20 sessions.
Reuters
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