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Canada’s main stock index posted its biggest decline in one year on Thursday as the U.S. Federal Reserve’s hawkish stance added to investor worries that higher borrowing costs will derail economic growth.

The S&P/TSX composite index was down 423.07 points, or 2.1%, at 19,791.62, its lowest closing level since Aug. 24 and its biggest decline since September 2022.

Wall Street also was down sharply, though not quite to the same degree. All three major U.S. stock indexes tumbled more than 1% as benchmark U.S. Treasury yields touched a 16-year peak. Canadian bond yields also climbed to fresh multi-year highs.

Interest rate-sensitive megacaps, led by, Nvidia Corp, Apple Inc and Alphabet Inc dragged the S&P 500 and the Nasdaq to their lowest closing levels since June.

The moves came the day after Fed Chairman Jerome Powell warned inflation still has a long way to go before approaching the central bank’s 2% target.

“Yields appear to be spiking, so people are still worried about future rate hikes,” said Michael Sprung, president at Sprung Investment Management. “Inflation is not tamed yet and I think the market is getting worried about the financial position of consumers.”

On Wednesday, at the conclusion of its two-day monetary policy meeting, the central bank left the Fed funds target rate unchanged at 5.25%-5.50%, as expected.

But revised economic projections, including the closely watched dot plot, showed interest rates will remain elevated through next year, dampening hopes for easing of policy before 2025.

“If you do have rates higher for longer, you have more strain on the system and more pressure on the economy,” said Thomas Martin, Senior Portfolio Manager at GLOBALT in Atlanta. “It gives people another chance to say that the lag time of higher rates – which we’re just starting to feel – might really bite.”

“We’re ratcheting up the possibility that we won’t get a soft landing,” Martin said, citing economic pressure from higher rates, along with U.S. student loan payments resuming, the UAW strike, a potential government shutdown in Washington, higher Treasury yields, climbing crude prices and a strengthening U.S. dollar.

An unexpected 9% drop on Thursday in initial U.S. jobless claims, to the lowest level in eight months, played into the Fed’s notion that the labour market remains too tight, putting upward pressure on wages, and the economy is resilient enough to withstand higher rates for longer.

“Higher for longer” has become a common credo among the central banks of the world’s biggest economies as global policy tightening, in order to tame inflation, reaches its peak.

That includes Canada. Data on Tuesday showed that Canadian inflation climbed more than expected to 4% in August. Money markets are now pricing in about a 40% chance the Bank of Canada will hike interest rates by another quarter percentage point at its next policy meeting Oct. 25.

The Canadian 10-year bond yield on Thursday touched a 15-year high at 3.98%. Some have warned that Canada’s record of declining productivity over the past three years is likely to make it more difficult for the Bank of Canada to tame inflation, raising the prospect of additional interest rate hikes even as the economy slows. Declining productivity tends to hold back economic growth. It also stands to add to unit labor costs, a key measure of inflation pressures coming from higher wages.

All 10 of the Toronto market’s major sectors lost ground on Thursday, including a decline of 2.4% for materials, which includes precious and base metals miners and fertilizer companies, as copper and gold prices fell.

Shares of Teck Resources Ltd were among the biggest decliners, falling 4.4%. India’s JSW Steel Ltd is slowing down the process to buy a stake in Teck’s steelmaking coal unit, a source close to the discussions said, in the first sign that a diplomatic spat is affecting trade ties.

Energy fell 1.5% in Toronto, technology lost 3.4% and heavily-weighted financials were down 1.8%.

The Dow Jones Industrial Average fell 370.46 points, or 1.08%, to 34,070.42, the S&P 500 lost 72.2 points, or 1.64%, to 4,330 and the Nasdaq Composite dropped 245.14 points, or 1.82%, to 13,223.99.

All 11 major sectors of the S&P 500 lost nearly 1% or more, with real estate stocks suffering its biggest one-day percentage drop since March.

The Philadelphia chip index shed 1.8%.

Some of the shine has been wearing off on shares of Nvidia and other U.S. semi-conductor companies after a stunning 2023 rally, as investors weigh steep valuations, rising Treasury yields and signs of industry unease.

Chip stocks soared to start the year, with the Philadelphia chip index rising over 50 per cent through July. Nvidia saw its shares triple in 2023 as the company’s market value topped US$1-trillion, driven by excitement over the central role of the company’s products in artificial intelligence applications.

But performance for the group has stalled. The SOX semi-conductor index is off over 7 per cent this month, while shares of Nvidia – a driver of the broader market’s rally this year – have declined more than 15 per cent in September.

As the stocks rose this year, so did valuations. At the end of July, the 21-stock S&P 500 semi-conductors and semi-conductors equipment industry group was trading at 28.5 times forward 12-month earnings estimates, compared to its 10-year average P/E of 16.5 times, according to LSEG Datastream.

Even with this month’s declines, the group still trades at a forward P/E of 23.5 times.

“Coming out of the pandemic and with this rise in popularity and race for AI-related innovation, that created a tailwind for semi-conductor stocks,” said Kevin Mahn, president and chief investment officer at Hennion & Walsh Asset Management. With “some of the names that really have catapulted to the top, now you are starting to question valuations,” Mr. Mahn said.

Interest in the AI sector from retail investors is also waning, according to VandaTrack, which tracks retail activity.

Industry-specific issues are weighing on the group as well, investors said, including ongoing tensions between the United States and China over semi-conductors. Washington is considering restrictions on sales of AI microchips, following export controls last year to cut China off from certain semi-conductor chips made anywhere in the world with U.S. equipment.

Higher bond yields are also a headwind for tech stocks in general, and that trend continued on Thursday. Benchmark US 10-year note yields hit 4.492%, the highest since November 2007. Interest rate sensitive two-year yields reached 5.202%, the highest since July 2006.

In other U.S. stock moves Thursday, Klaviyo Inc gained 2.9% the day after its debut as a public company, while another recent IPO, Arm Holdings lost 1.4% to just a dollar above its $51 offer price.

Shares of FedEx jumped 4.5% after the package delivery company delivered a big profit beat.

Fox Corp and News Corp gained 3.2% and 1.3%, respectively, following news that Rupert Murdoch will step aside as chairman.

Declining issues outnumbered advancing ones on the NYSE by a 5.89-to-1 ratio; on Nasdaq, a 2.80-to-1 ratio favored decliners. The S&P 500 posted three new 52-week highs and 29 new lows; the Nasdaq Composite recorded 22 new highs and 373 new lows. Volume on U.S. exchanges was 10.76 billion shares, compared with the 10.12 billion average for the full session over the last 20 trading days.

Reuters, Globe staff

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