Powell speech to signal higher rates for longer: Strategist
North American stock markets were down sharply Friday as investors reacted negatively to a speech by Federal Reserve chair Jerome Powell in which he said he expects to keep interest rates high in his fight against inflation.
The S&P/TSX composite index was down 299.05 points at 19,873.29.
In New York, the Dow Jones industrial average was down 1,008.38 points at 32,283.40. The S&P 500 index was down 141.46 points at 4,057.66, while the Nasdaq composite was down 497.56 points at 12,141.71.
Financial markets had been waiting all week for Powell’s highly anticipated speech from what is an annual meeting of U.S. central bankers at Jackson Hole, Wyo.
Investors had hoped Powell would use his remarks to signal the Fed’s willingness to begin easing its interest rate hiking cycle — perhaps even reversing some of its already instituted hikes as early as 2023.
That wasn’t what happened, however. Powell’s speech was far more hawkish in tone, as he made it clear that interest rates will need to continue to rise and will stay high for longer than many investors had hoped.
“He was more explicit than he’s been at any other point in time that rates are going to remain higher for a much longer period of time in order to combat inflation,” said Mike Archibald, VP and portfolio manager with AGF Investments Inc.
“That’s put some pressure on various parts of the capital markets, and certainly on equities today.”
Hardest-hit were growth stocks such as technology, which are more sensitive to interest rates. The S&P/TSX capped technology index was down 4.39 per cent, and the health care index — home to riskier cannabis stocks — was down 5.05 per cent by end of day.
But there wasn't a single sector on the TSX that didn't end Friday in the red, and south of the border, all but six of the companies in the benchmark S&P 500 ended in negative territory.
Commodities, too, took a hit, with gold down significantly. The U.S. dollar rose significantly against most major currencies as the 10-year Treasury yield, which follows expectations for longer-term economic growth and inflation, rose to 3.04% from 3.03% late Thursday.
In his speech, Powell acknowledged interest rate increases will hurt households and businesses. But he also said the pain would be far greater if inflation were allowed to fester and that “we must keep at it until the job is done.”
“There’s no easy way out of this, clearly," said Archibald, acknowledging that fiscal tightening policies by central banks have historically not been friendly to equities markets.
"I think we're going to be in for periods of volatility as rates continue to tighten," he added. "I think it’s probably going to be a little bit more of a sideways choppy market for the foreseeable future, until we get close to the end of the hiking cycle.”
While Powell's speech and the reaction to it were the main stories of the day, in Canada, a Waterloo-based tech company saw its share value plummet in the wake of a major acquisition announcement.
OpenText, which announced Thursday evening it will acquire U.S.-based Micro Focus International plc in a deal valued at $6 billion, saw its share price decline more than 14 per cent in Friday's trading, making it the day's worst performer on the S&P/TSX composite.
Archibald said investors are skeptical of the 100 per cent premium OpenText is paying for the British tech firm, as well as $4.6 billion in new debt it will take on to fund the deal.
“The market clearly doesn’t like that acquisition today," Archibald said.
The Canadian dollar traded for 76.99 cents US compared with 77.30 cents US on Thursday.
The October crude contract was up 54 cents at US$93.06 per barrel and the October natural gas contract was down seven-and-a-half cents at US$9.27 per mmBTU.
The December gold contract was down US$21.60 at US$1,749.80 an ounce and the September copper contract was down less than a penny at US$3.70 a pound.