(February 18 – 17:30 ET) – Traders keyed in on yesterday’s comments from U.S. Federal Reserve Chairman Alan Greenspan hinting that more interest-rate increases are coming down the pipe. U.S. Stocks skidded Friday in a broad sell-off. The Dow Jones Industrial Average sank to its lowest level in four months, dropping 295.05 points to 10219.52.
Worries about rising rates also fueled profit-taking in the high flying technology sector and among small stocks. The technology stock-rich Nasdaq sank 137.17 to 4441.75. Among technology issues, Microsoft dropped 4 9/16 to 95 1/16; International Business Machines fell 4 1/8 to 112 5/8; Ebay lost 7 1/8 to 138 1/8; Yahoo fell 7 1/16 to 156 1/8.
In Canada the stock picture was pretty similat. The TSE 300 dropped 168.09, down to 9295.50. The S&P500/TSE lost 11.77, dropping to 545.20.
The CDNX was the only exchange to break the overall trend. It added 49.7 points, finishing at 49.7.
Canadian economists are following in step with Greenspan. The big picture guys are expecting plenty of rate hikes.
Analysts at CIBC World Markets argue that the effects of US$30 oil have not yet been reflected in inflation figures. And since the Fed hasn’t seen any slowing effect from past rate hikes, more rate hikes are to come. “We’ve added a second rate hike to our Fed funds call, looking for 25 basis points in March and a further quarter point by June,” says CIBC. It expects the bond market to begin pricing in those hikes immediately.
Economists at RBC Dominion Securities Inc. expect similar moves, although a slightly different timetable. They forse a 25 bps moves at the March 21 and May 16 Fed meetings, “with a risk one of them could be 50 basis points”.
Canadian markets will receive inflation data in the coming week. CIBC expects that to validate the Bank of Canada’s expectations for continued strong growth. In that climate, contends CIBC, there’s little doubt that Bank governor Gordon Thiessen “will take his marching orders from the Fed, and move Canadian overnight rates in lockstep with those stateside.”
DS expects “the BoC to match any near-term Fed moves and take Canadian monetary policy to a less stimulative setting.” Although Canada is under slightly less pressure than the U.S. “if the upside risks to Fed policy are realized, we suspect that the Bank will match some, but not necessarily all of the Fed moves.”
U.S. traders get Monday off for President’s Day, but Greenspan will be back before the Senate on Tuesday. He is expected to simply reiterate this week’s testimony.
-IE Staff