Hot U.S. inflation knocks the TSX down nearly 400 points as Fed hike bets rise

An inflation report from Washington set the tone on Bay Street on Wednesday, October 14. The S&P/TSX composite index closed at 35,584.46, down 399.52 points, or 1.11%, after U.S. data showed consumer prices accelerating faster than expected in September.

U.S. markets also fell. The S&P 500 lost 86.51 points to 7,718.94 and the Nasdaq composite dropped 511.51 points to 26,692.87, while the Dow Jones industrial average slipped 48.62 points to 51,621.48.

The inflation numbers

According to the U.S. Bureau of Labor Statistics data reported by Beinsure:

The U.S. Federal Reserve raised rates in September for the first time in more than three years, to a range of 3.75% to 4%. After the report, traders priced a 46% chance of another quarter-point hike on October 28, according to LSEG data cited by Reuters.

• Headline CPI rose 0.6% in September and 3.7% from a year earlier, up from 3.4% in August and above the 3.6% economists expected
• Core CPI, excluding food and energy, rose 0.3% on the month versus a 0.2% forecast, and 2.6% on the year versus 2.5% expected
• Gasoline prices jumped 9.1% in the month and were up 34.2% from a year earlier

Who fell and who held up

Materials stocks were the biggest drag, with the sector down 3.9% in morning trading as precious metals fell, according to Reuters. December gold settled down US$69.40 at US$4,107.90 an ounce. Financials, including the big banks, were down 0.8% by mid-morning. Among individual names, Perpetua Resources fell 10.24%, Energy Fuels 10.08% and Celestica 9.20%, according to Investing.com.

Defensive names did better. Labrador Iron Ore Royalty rose 4.25%, Canadian Utilities 3.22% and Emera 3.06%. Oil also held firm, with the November crude contract up 95 cents at US$95.09 a barrel. The Canadian dollar traded at 70.11 cents US, down from 70.31 cents US on Tuesday.

The Canadian angle

Higher U.S. inflation matters in Canada because it raises the odds of tighter policy south of the border and pushes up bond yields here. Canada's 10-year government bond yield rose to 3.91% on Wednesday morning, according to Reuters. The Bank of Canada makes its own decision on October 28, the same day as the Fed.

"Canada will join other global central banks in hiking interest rates," said Angelo Kourkafas of Edward Jones, though he added that the increases may be smaller than futures or bond markets expect.

The counter-argument

Much of the U.S. jump came from gasoline, which can reverse as quickly as it rose. Core inflation of 2.6% remains far below the headline rate, and Fed Governor Christopher Waller has argued that higher Treasury yields are already tightening financial conditions, which lessens the urgency of an October move. In Canada, the latest jobs report showed 68,000 positions lost in September, which argues for caution at the Bank of Canada.

What it means for Canadian investors

Days like this show how closely the TSX tracks U.S. interest-rate expectations, and how volatile gold and technology stocks can be after a strong run. A one-day drop of about 1% is not unusual for stock markets.

For long-term investors, a diversified portfolio that blends sectors, including steadier dividend payers such as utilities, can soften these swings. Those with variable-rate debt should watch the October 28 decisions closely. This is general information, not personalized advice.

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