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Canada’s main stock index fell on Tuesday by the most in two months after a hotter-than-expected inflation reading had traders wondering whether the country’s central bank is done with hiking interest rates this year.

Real estate, which is particularly negatively impacted by higher interest rates, was among the biggest declining sectors in Toronto.

Meanwhile, a disappointing forecast from Home Depot and a U.S. retail sales report for April - both pointing to softer consumer spending - undermined investor confidence across North American markets.

Bond yields rose in both the U.S. and Canada, though the spike was particularly notable north of the border, as bond markets swung from pricing in modest odds of a Bank of Canada rate cut by the end of this year to modest chances that the bank will announce another hike at upcoming meetings.

The Canada five-year bond yield - influential on setting of fixed mortgage rates - was up by 15 basis points by late afternoon, to a one-month high of 3.239%. The Canada two-year bond yield, which is particularly sensitive to central bank policy moves, was up 19 basis points to nearly 4%, its highest since early March.

Canada’s annual inflation rate ticked up to 4.4% in April, as higher shelter costs contributed to the first acceleration in the consumer price index in 11 months. Analysts polled by Reuters had expected annual inflation rate to edge down to 4.1% from 4.3% in March. Month-over-month, the consumer price index was up 0.7%, higher than the forecast 0.4% gain.

“Today’s numbers suggest that core inflation is proving to be more sticky than anticipated,” Royce Mendes, managing director & head of macro strategy at Desjardins Capital Markets, said in a note.While one data point won’t completely change the minds of central bankers, there’s growing evidence that further rate hikes might be necessary.”

The S&P/TSX composite index ended down 297.9 points, or 1.45%, to 20,242.07, its biggest decline since March 15.

All ten major sectors fell. Energy, materials and real estate all declined about 2%. Financials fell 1.3%.

Oil settled 0.4% lower at US$70.86 a barrel.

In the U.S., Home Depot declined 2.15% as one of the biggest drags on both the Dow Industrials and S&P 500 after the home improvement retailer cut its annual sales forecast and projected a steeper-than-expected decline in profit. Shares of peer Lowe’s Companies Inc fell 1.16%.

“You can argue that people are tired of spending on the house, they want experiences, they want to go out they want to do other things, they don’t want to fix up the house according to Home Depot, because they had horrendous earnings,” said Ken Polcari, managing partner at Kace Capital Advisors in Boca Raton, Florida.

The Commerce Department reported retail sales rose 0.4% in April, short of the estimate for an increase of 0.8%. But core retail sales rebounded, a figure excluding automobiles, gasoline, building materials and food services.

“There is a sense that people are starting to get a little bit more sensitive to the Fed being successful and this ongoing drama of the debt ceiling is causing angst.”

The Dow Jones Industrial Average fell 336.46 points, or 1.01%, to 33,012.14, the S&P 500 lost 26.38 points, or 0.64%, to 4,109.9 and the Nasdaq Composite dipped 22.16 points, or 0.18%, to 12,343.05.

Recent data has indicated slowing in the U.S. economy following a string of rate hikes by the Federal Reserve to fight high inflation. That slowing along with recent negotiations over the U.S. debt ceiling has focused attention on when the central bank will pause hiking, or cut interest rates.

While the market is currently pricing in at least one rate cut by the end of the year, recent comments from Fed officials suggested they are not ready to cut rates soon.

Richmond Fed President Thomas Barkin said he was “comfortable” with raising interest rates further if needed, but liked the “optionality” implied in the latest policy statement.

Cleveland Fed President Loretta Mester said she does not think the central bank can hold interest rates steady yet.

Lawmakers held a new round of talks about raising the debt ceiling. The Treasury Department has warned it could run out of money as soon as June 1 without a deal, which would trigger a default and likely cause a sharp economic slump.

Horizon Therapeutics tumbled 14.17% as the Federal Trade Commission said it would file a lawsuit to block Amgen Inc’s $27.8 billion deal to buy the company. Shares of Amgen fell 2.42%.

The decline in both stocks weighed on the Nasdaq Biotech Index, which closed at a three-week low after dropping 2.44%, its biggest one-day percentage decline in three months.

Shares of Capital One Financial Corp climbed 2.05% the day after Berkshire Hathaway Inc disclosed it had taken a stake of nearly $1 billion in the stock.

Declining issues outnumbered advancing ones on the NYSE by a 4.05-to-1 ratio; on Nasdaq, a 2.28-to-1 ratio favored decliners. The S&P 500 posted 12 new 52-week highs and 13 new lows; the Nasdaq Composite recorded 47 new highs and 188 new lows. Volume on U.S. exchanges was 9.36 billion shares, compared with the 10.58 billion average for the full session over the last 20 trading days.

With files from Reuters

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