Wall Street closed down on Tuesday as traders, already cautious of making new bets on the eve of a U.S. Federal Reserve meeting expected to bring another large interest rate hike, absorbed further evidence of inflation slowing American business. The dour mood extended into Canada, where the TSX saw a broad-based selloff as the loonie reached nearly two-year lows against the greenback on a tamer-than-expected inflation report.
The benchmark S&P 500 index has dropped 19.1% so far this year as investors fear aggressive policy tightening measures by the Fed could tip the U.S. economy into a recession.
It closed for the third straight session below 3,900 points - a level considered by technical analysts as a strong support for the index - as last week’s dire outlook from delivery firm FedEx Corp was repeated, this time by automaker Ford Motor Co.
Shares of Ford slumped 12.3%, the biggest one-day drop since 2011, after it flagged a bigger-than-expected $1 billion hit from inflation and pushed delivery of some vehicles to the fourth quarter due to parts shortages.
Rival General Motors Co also sank 5.6%.
“We have seen some bellwethers talk about the pressures they are facing, so we could see some margin compression and some softening in the topline numbers in the third-quarter earnings,” said Greg Boutle, head of U.S. equity & derivative strategy at BNP Paribas.
The U.S. central bank is widely expected to hike rates by 75 basis points for the third straight time at the end of its policy meeting on Wednesday, with markets also pricing in a 17% chance of a 100 basis point increase and predicting the terminal rate at 4.49% by March 2023.
Focus will also be on the updated economic projections and dot plot estimates for cues on policymakers’ sense of the endpoint for rates and the outlooks for unemployment, inflation and economic growth.
Adding to the mix, a Commerce Department report showed residential building permits - among the more forward-looking housing indicators - slid by 10% to 1.517 million units, the lowest level since June 2020.
The benchmark U.S. 10-year Treasury yield hit 3.56%, its highest level since April 2011, while the closely watched yield curve between two-year and 10-year notes inverted further.
An inversion in this part of the yield curve is viewed as a reliable indicator that a recession will follow in one to two years.
“There are a lot of headwinds to prevent sustained rallies. It’s hard to have (price-to-earnings) expansion while the Fed is tightening,” said BNP’s Boutle.
The Dow Jones Industrial Average fell 313.45 points, or 1.01%, to 30,706.23, the S&P 500 lost 43.96 points, or 1.13%, to 3,855.93 and the Nasdaq Composite dropped 109.97 points, or 0.95%, to 11,425.05.
All of the 11 major S&P sectors declined, with economy-sensitive real estate and materials sectors the biggest fallers, dropping 2.6% and 1.9% respectively.
Meanwhile, in another sign of nerves around future corporate earnings, Nike Inc fell 4.5% after the sportswear giant was downgraded by Barclays analysts to “equal weight” from “overweight,” citing volatility in the Chinese market due to pressures from COVID-related lockdowns in early September.
Another apparel maker, Gap Inc, closed 3.3% lower. It announced on Tuesday it was eliminating about 500 corporate jobs, having withdrawn its annual forecasts late last month due to an inventory glut and weak sales.
Volume on U.S. exchanges was 9.90 billion shares, compared with the 10.71 billion average for the full session over the last 20 trading days. The S&P 500 posted two new 52-week highs and 66 new lows; the Nasdaq Composite recorded 31 new highs and 408 new lows.
The Toronto Stock Exchange’s S&P/TSX composite index ended nearly 1% lower at 19,368.69.
The materials group, which includes precious and base metals mining and fertilizer companies, lost 1.1%. Energy was down 0.3% and financials, which are also heavily weighted, ended 0.9% lower. U.S. crude futures settled 1.5% lower at $84.45 a barrel.
Canada’s annual inflation rate slowed to 7.0% in August, below analyst forecasts of 7.3% and down from 7.6% in July.
Much of the deceleration was due to lower gasoline prices and slower gains in the shelter index, but all three core measures of inflation also eased slightly.
Money markets see an 85% probability of a 50-basis-point interest rate hike by the BoC in October, after having fully priced in a move of that magnitude before the inflation data.
The inflation data, as well as the selloff in oil and stocks weighed on the Canadian dollar, said George Davis, chief technical strategist at RBC Capital Markets, adding that the “risk-off tone” gave the U.S. dollar a broad-based boost.
The Canadian dollar touched its weakest since October 2020 at 1.3374 per U.S. dollar, or 74.77 U.S. cents, down 0.9% on the day. Since the start of 2022, the currency has lost 5.5%.
Canadian government bond yields were lower the curve, which was a rare contrast with the U.S. The 10-year eased nearly 5 basis points to 3.103%, while it fell about 11 basis points further below the equivalent U.S. rate to a differential of 45.2 basis points.
Reuters, Globe staff
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.