Broader economic anxiety weighed on markets ahead of a long-anticipated rate decision from the U.S. Federal Reserve Wednesday, said Philip Petursson, chief investment strategist at IG Wealth Management.
The S&P/TSX composite index closed down 129.51 points at 20,492.83.
Shopify was a major drag on Canadian markets Monday, Petursson noted, helping explain why the TSX posted a worse day than U.S. markets. The tech company’s stock closed down more than five per cent.
In New York, the Dow Jones industrial average was up 6.06 points at 34,624.30. The S&P 500 index was 3.21 points points at 4,453.53, while the Nasdaq composite was up 1.90 points at 13,710.24.
The new dynamic of oil prices, which continued their steady climb above US$90 per barrel, will put upward pressure on inflation as central banks weigh whether more hikes are necessary, Petursson said.
The November crude contract was up 56 cents at US$90.58 per barrel on Monday.
While gas prices feed into headline inflation, they also roll into other goods, including food, the prices of which could rise and heat up inflation as well, said Petursson.
The Fed is expected to hold its key rate this month but it could hike in November, he said, so the market will be much more focused on what officials have to say about their decision.
“I think the Fed now is going to take the approach where the pen is mightier than the sword,” he said -- with the sword being interest rate hikes, and the pen hawkish messaging.
The central bank wants to avoid sparking optimism among investors, which would risk losing hard-fought ground over inflation, said Petursson.
“They need to walk back inflation expectations so that it almost becomes a self-fulfilling prophecy,” he said.
If the Fed decides to hike rates again this year, the Bank of Canada will be in a tough spot, said Petursson. The broader differential between the two central banks’ interest rates could weaken the Canadian dollar, which could send inflation higher and pressure the Bank of Canada to raise again.
“We're starting to see the adverse effects on the Canadian economy from all the interest rate increases,” he said.
“So we're walking a very, very fine line here.”
On Tuesday, Canada gets the latest report on inflation. The headline number for August is expected to climb because of gas prices but also because it will be in comparison to what was a weaker month a year ago, said Petursson.
“What the Bank of Canada is going to be focused on is the month-over-month as opposed to the year-over-year,” he said. “Inflation month-over-month has been, you know, a little bit higher than I think where they're comfortable with.”
The Canadian dollar traded for 74.12 cents UScompared with 73.93 cents US on Friday.
The October natural gas contract was up eight cents at US$2.73 per mmBTU.
The December gold contract was up US$7.20 at US$1,953.40 an ounce and the December copper contract was down two cents at US$3.78 a pound.
This report by The Canadian Press was first published Sept. 18, 2023.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD=X)
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