U.S. and Canadian markets ended Monday lower, as investors spooked by better-than-expected data from the services sector re-evaluated their thinking on the Federal Reserve’s interest rate policy, while shares of Tesla slid on reports of a production cut in China.
The data showed activity unexpectedly picked up in November, with employment rebounding, offering more evidence of underlying momentum in the economy.
It came on the heels of a survey last week that showed stronger-than-expected job and wage growth in November, challenging hopes that the Fed might slow the pace and intensity of its rate hikes amid recent signs of ebbing inflation.
“Today is a bit of a response to Friday, because that jobs report, showing the economy was not slowing down that much, was contrary to the message which (Chair Jerome) Powell had delivered on Wednesday afternoon,” said Bernard Drury, CEO of Drury Capital, referencing comments made by the head of the Federal Reserve saying it was time to slow the pace of coming interest rate hikes.
“We’re back to inflation-fighting mode,” Drury added.
Investors see an 89% chance that the U.S. central bank will increase interest rates by 50 basis points next week to 4.25%-4.50%, with the rates peaking at 4.984% in May 2023.
The rate-setting Federal Open Market Committee meets on Dec. 13-14, the final meeting in a volatile year, which saw the central bank attempt to arrest a multi-decade rise in inflation with record interest rate hikes.
The aggressive policy tightening has also triggered worries of an economic downturn, with JPMorgan, Citigroup and BlackRock among those that believe a recession is likely in 2023.
Tesla slumped 6.4% on plans to cut December output of the Model Y at its Shanghai plant by more than 20% from the previous month.
This weighed on the Nasdaq, where Tesla was one of the biggest fallers, pulling the tech-heavy index to its second straight decline.
In Canada, the S&P/TSX composite index ended down 243.40 points, or 1.2%, at 20,242.26, its biggest decline since Nov. 9.
It was the index’s second day of declines after last Thursday posting its highest closing level in nearly six months.
“I would view it largely as profit-taking based on overbought conditions,” said Joseph Abramson, co-chief investment officer at Northland Wealth Management in Oakville, Ont.
“We are still in that two steps forward, one step backward market, where we’re getting to the point where we’re discounting a peak in interest rates and discounting a recession.”
The Bank of Canada has also been raising interest rates. Money markets are betting on a 25-basis-point increase when the central bank meets to set policy on Wednesday but a slim majority of economists in a Reuters poll expect a larger move.
The Toronto market’s energy group fell 2.9% as the price of oil settled 3.8% lower at $76.93 a barrel.
The materials group, which includes precious and base metals miners and fertilizer companies, lost 1.6% as gold and copper prices fell.
Technology was also a drag, falling 2.8%, while heavily-weighted financials ended nearly 1% lower.
The Dow Jones Industrial Average fell 482.78 points, or 1.4%, to close at 33,947.1, the S&P 500 lost 72.86 points, or 1.79%, to end on 3,998.84, and the Nasdaq Composite dropped 221.56 points, or 1.93%, to finish on 11,239.94.
In other U.S. economic data this week, investors will also monitor weekly jobless claims, producer prices and the University of Michigan’s consumer sentiment survey for more clues on the health of the U.S. economy.
Energy was among the biggest S&P sectoral losers, dropping 2.9%. It was weighed by U.S. natural gas futures slumping more than 10% on Monday, as the outlook dimmed due to forecasts for milder weather and the delayed restart of the Freeport liquefied natural gas (LNG) export plant.
EQT Corp, one of the largest U.S. natural gas producers, was the steepest faller on the energy index, closing 7.2% lower.
Financials were also hit hard, slipping 2.5%. Although bank profits are typically boosted by rising interest rates, they are also sensitive to concerns about bad loans or slowing loan growth amid an economic downturn.
Meanwhile, apparel maker VF Corp dropped 11.2% - its largest one-day decline since March 2020 - after announcing the sudden retirement of CEO Steve Rendle. The firm, which owns names including outdoor wear brand The North Face and sneaker maker Vans, also cut its full-year sales and profit forecasts, blaming weaker-than-anticipated consumer demand.
Volume on U.S. exchanges was 10.78 billion shares, compared with the 11.04 billion average for the full session over the last 20 trading days. The S&P 500 posted six new 52-week highs and four new lows; the Nasdaq Composite recorded 105 new highs and 133 new lows.
The Canadian dollar weakened to a six-day low against its U.S. counterpart on Monday, as the strong U.S. data bolstered the greenback. By late afternoon, the loonie was trading 1% lower at 73.52 U.S. cents.
Canadian government bond yields rose across the curve, tracking the move in U.S. Treasuries. The 10-year was up 5.7 basis points at 2.836%, after on Friday touching its lowest intraday level since Aug. 16 at 2.771%.
Reuters, Globe staff
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