Bank of Canada Hikes Rate by 1.00%, Beating the Fed to the Punch
"The Bank of Canada hiked interest rates by a full percentage point, a surprise move that supercharges efforts to withdraw stimulus amid fears four-decade-high inflation is becoming entrenched.
Governor Tiff Macklem raised the central bank’s policy rate to 2.5 per cent in a decision announced Wednesday in Ottawa that warned of more hikes to come. The 100-basis-point move is the largest increase since 1998. Markets and economists were anticipating 75 basis points.
The Canadian dollar soared on the move, rising more than 0.5 per cent to $1.2952 per U.S. dollar at 12:14 p.m. in Toronto trading. Yields on two-year sovereign bonds jumped about 10 basis to 3.31 per cent.
Investors ramped up bets that front-loading also means rates will plateau higher than previously expected. Overnight swaps are suggesting Macklem will hike the benchmark to 3.75 per cent by the end of this year, up from 3.5 per cent before the decision.
Policy makers also slashed their outlook for the Canadian economy. They now see gross domestic product expanding 3.5 per cent this year and 1.8 per cent in 2023, down from 4.2 per cent and 3.2 per cent respectively, as global growth moderates and tighter monetary policy impacts activity." - read more on BNN here
Breaking Thoughts: Stocks this year have been hit hard by the triple whammy of inflation, global conflicts and rising rates. In tandem with the announcement, Canadian stocks (TSX) hit their yearly lows last week.
As base interest rates go up, savings rates & government bond rates go up, pushing money out of higher risk stocks and into lower risk interest income opportunities. This has the effect of increasing discount rates across the economy and lowering company valuations (as their cost of capital increases), investors are thus willing to pay lower multiples of earnings even for high quality companies.
Given inflation in Canada is well above 7%, its likely that they will continue to raise rates throughout the year and that there will be ongoing pressure on equity valuations. The same is true for the US which may follow Canada's lead in hiking 1% at a time.
Investors should tread carefully as even companies with improving fundamental results may only stay flat as their multiples decline. Further, hiking interest rates quickly risks a potential recession, in which case most firms will miss earnings and investors may sell out in order to pay bills/debts striking market valuations much harder than we've seen so far this year.
In the same breath, some investors are hoping that central banks raise rates MUCH faster in order to "rip the band aid off" while the economy is still strong-ish in order to tame inflation, avoid any severe recessions, and keep the market afloat. The future is always unknown, risks of downturns must be weighted against the potential of a rosy outcome.
Major Earnings This Week
Monday July 18:
Bank of America (BAC): Expected Q2 earnings of $0.75 per share
Goldman Sachs (GS): Expected Q2 earnings of $6.58 per share
Tuesday July 19:
Hasbro (HAS): Expected Q2 earnings of $0.95 per share
Netflix (NFLX): Expected Q2 earnings of $2.95 per share
Wednesday July 20:
ASML (ASML): Expected Q2 earnings of $3.81 per share
Tesla (TSLA): Expected Q2 earnings of $1.86 per share
Thursday July 14:
AT&T (T): Expected Q2 earnings of $0.61 per share
Danaher (DHR): Expected Q2 earnings of $2.36 per share
Domino's Pizza (DPZ): Expected Q2 earnings of $2.89 per share
Mattel (MAT): Expected Q2 earnings of $0.06 per share
Seagate Technology (STX): Expected Q2 earnings of $1.91 per share
Snap (SNAP): Expected Q2 earnings of $-0.01 per share
Friday July 15:
Twitter (TWTR): Expected Q2 earnings of $0.14 per share
Verizon (VZ): Expected Q2 earnings of $1.33 per share
Major IPOs Expected This Week
None
See you next week!
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The Market News Reel for this week! Get the most important market news & updates for the week ahead! Major headlines, excerpts from news sources are shown above. "Breaking Thoughts" section is purely our opinion.