Canada’s Rate Hike Just Spooked Markets

It was a sleepy morning on Wall Street as the S&P edged down by 0.2%, still hovering near resistance from several days ago and its August 2022 highs. The Dow moved in the opposite direction, gaining a slight 49 points (or 0.2%), while the tech-heavy Nasdaq Composite retreated by 0.7%. Climbing yields weighed heavily on tech.

The energy sector took the lead today, rising 2.3% despite an otherwise uneventful session. The SPDR S&P Oil & Gas Exploration & Production ETF and First Trust Natural Gas ETF both advanced, gaining 3.5% and 3.3%, respectively. Dave & Buster’s and Stitch Fix also stood out, with their stocks surging 21% and more than 32% after announcing quarterly results.

It’s no secret that artificial intelligence hype has been a tailwind for tech stocks, contributing to a more than 7% increase in the S&P 500 over the past three months. But analysts are starting to get worried about whether stocks – and, in particular, tech shares – can continue their impressive run.

“We still have leading economic indicators down 13 months in a row. We still have an inverted yield curve [and] liquidity issues,” said Crossmark Global Investments CIO Bob Doll.

“I think there’s more impact to come. I would be a little cautious [and] not long-route rallies.”

Investors learned today that the U.S. trade deficit widened in April but less than economists expected. This growing deficit could potentially shave off some GDP growth in the second quarter as traders look for recession signals.

But what really stunned markets today was a surprise rate hike from the Bank of Canada, which lifted its key overnight rate by 25 basis points to 4.75%. The central bank said that demand “looks to be more persistent” than expected and “concerns have increased” that inflation could remain above its target of 2%.

Sound familiar? It’s more or less what Fed Chairman Jerome Powell has said over the last months as the Fed lifted rates. Today’s hike from the Great White North jolted U.S. Treasurys lower, spiking yields. The US 10-year Treasury yield rose above 3.78% and is on track to hit 4.00% before the end of the month. A clear uptrend in rates has formed, which is tilting the odds on the CME Group’s FedWatch Tool.

Treasurys are now pricing in a 35% chance of a 25 basis point hike on June 14th when the Fed wraps its meeting. Those odds are likely to rise further in the coming days.

And a rate hike next week would undoubtedly be damaging for stocks. Today’s Canadian hike spooked growth shares due to not only the hike itself but concerns that central banks are about to continue hiking into a recession. As part of today’s trade data release, Chinese exports slumped 7.5% year-over-year in May vs. -0.4% expected, sending a major global recession signal to markets.

“Weaker global trade is not a new story, but it is surprising how quickly China’s reopening boost has faded, with backlogs of work supporting export numbers until now even as other countries have continued to see demand for their goods wane,” wrote Oanda analyst Craig Erlam in a note.

“With China’s reopening boom flagging so quickly, pressure is set to intensify on the leadership to announce new stimulus measures in a bid to revitalize the economy again.”

Beijing is asking its banks to cut rates while Canada’s central bank just raised its overnight rate to a 22-year high. That’s not an auspicious combination for stocks, and it should only serve to amplify rate hike anxiety through June as the S&P attempts to press on to even higher highs from here.


Please enter your comment!
Please enter your name here