How the market’s Fed freakout played out in Canada

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So long Santa rally.

That must have been on the minds of many investors after the Federal Reserve rate decision yesterday.

By the time Fed chair Jerome Powell wrapped up the press conference Wednesday afternoon traders were stampeding for the exits.

The selloff stripped almost 3 per cent off the S&P 500, the Dow Jones Industrial Average plunged more than 1,100 points, and the Nasdaq composite shed 3.6 per cent.

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The last time markets saw a worse Fed decision day was on Sept. 17, 2001, when the index fell almost 5 per cent, Bloomberg reports.

Fear was in the air as Treasury yields soared, climbing the most on a Fed day since the taper tantrum in 2013. The Cboe Volatility Index, or VIX, spiked to 28.

It wasn’t what the Fed did. The quarter-point cut, the third in a row bringing the rate range to 4.25 per cent to 4.5 per cent, was widely expected.

It was what it suggested in the “dot plot” projection and Powell’s comments that future cuts would require cooler inflation. The Fed now sees two cuts next year, rather than the four it was forecasting in September.

“A more hawkish dot plot and guidance that the pace of easing is about to get dialled back landed like a lump of coal,” said Robert Kavcic, senior economist at BMO Capital Markets, in a note.

The shockwaves crossed the border, with the TSX falling more than two per cent.

Higher Treasury yields impacted Canada as well with the 5-year GoC yield, the one watched by the mortgage market, rising 8 basis points, he said.

The Canadian dollar also took a hit, shedding almost a penny to a low of 69.15 cents U.S. last night.

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“It’s all negative sentiment for the currency right now,” Kavcic said.

The gap between the Bank of Canada rate and the Fed’s, a major influence on the loonie, has widened and the Federal Reserve’s hawkish message yesterday will not improve sentiment.

One bright spot is that Bank of Canada also leaned toward caution in its recent decision, he said.

So was this a knee-jerk reaction by markets or the sign of trouble ahead?

Jamie Cox, managing partner at Harris Financial Group, said the Fed was just a catalyst that prompted investors to do what they would do anyway, sell and lock in profits before the holidays, said Bloomberg.

“The stock market got way over its skis ahead of this meeting and this is a good way to shake some people out before the holidays,” Cox said.

Ipek Ozkardeskaya, senior analyst with Swissquote Bank, said the hawkish shift could trigger a “deeper correction” in markets that have enjoyed two outstanding years thanks to Big Tech.

Non-tech stocks waiting for rate cuts to rally may be out of luck.

“Unfortunately, the latest equity rally may fade before it extends to these overlooked corners of the market,” she said. Yesterday small-cap stocks took the biggest hit, with the Russell 2000 Index sinking 4.4 per cent.

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Markets in Europe and Asia fell this morning as they caught up with the selloff in North America, but U.S. futures were up suggesting at least a partial recovery.

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More evidence that the great migration to Atlantic Canada has fizzled out shows up in the latest population data from Statistics Canada.

During the pandemic more than 25,000 people a year moved east, but that interprovincial migration has dwindled to just about zero in the third quarter, says Robert Kavcic, senior economist with BMO Capital Markets.

The quarter marked the first time New Brunswick lost people to migration within the country since late 2019, and first time for Newfoundland and Labrador since 2020.

Alberta, on the other hand, is gaining the most interprovincial migrants in Canada, attracting almost 50,000 people a year.

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Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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