Uncertainty Around Endpoint For Rate Hikes Takes Canada's TSX Back Below 20,500 Level

Last Updated: Friday, December 2, 2022 4:25 PM | MT Newswires

Canada's main stock market, Toronto Stock Exchange, ended Friday's session down 40 points and back below the 20,500 level as market watchers continued to digest news from early in the day that the economy here added about 10,000 jobs in November, leaving the unemployment rate at 5.1%.

The job market data suggested a tight labour market will prompt the Bank of Canada to raise its key benchmark rate by 50 basis points, and not 25 basis points, next week. The TSX fell around 130 points in the early minutes Friday as investors appeared to be initially disappointed in realizing a 50 basis points increase was likely next Wednesday. But investors were calmer after that -- with the TSX spending some time in positive territory -- when also realizing that a slowdown in the pace of hikes is still expected heading into 2023.

Still, Douglas Porter, Chief Economist at BMO Economics, in his weekly "Talking Points" note of this Friday may have hit the nail on the head when saying: "Bringing it back to the meat of [Fed Chair] Powell's message this week, rates are going to need to stay higher for longer, and that likely applies to Canada as well."

This comes a day after BMO Capital Markets in an 'Investment Strategy: 2023 Market Outlook' disclosed a price target for the S&P/TSX of 22,500 for next year, based somewhat on an expectation that the TSX will outperform the S&P 500.

BMO said: "As we head into 2023, from an equity market perspective, we believe the TSX is further along in repricing the deceleration of earnings growth and the potential for a mild recession in 2023. As such, Canada remains well positioned for near-term outperformance which, in our opinion, will translate into mild outperformance versus the US in 2023 as valuations begin to converge. Indeed, the TSX offered strong downside protection in 2022, a trend we believe is set to continue as we head into another volatile year.

"Overall, we believe the Canadian stock market will attain mildly higher prices from current levels, with a 2023 year-end price target of 22,500 on earnings of just $1500. This represents a 7% annual return based on our 2022 year-end forecast, slightly ahead of our flat expected price return for the S&P 500 during the year.

"With that said, like the US, 2023 will be a "jack be nimble, jack be quick" environment -- an environment that will require more active positioning within Canada and its sectors, particularly as the market reacts to peak interest rates, the end of the tightening cycle, easing inflationary pressures, and the potential for a mild recession in the beginning months of 2023/ As such, both our investment strategy and portfolio positioning are likely setting up for "multiple revisions" during 2023, as the market transitions to normalcy and fundamentals react accordingly."

Of commodities today, gold fell off four-month highs on Friday, but rose off early lows after the dollar surrendered gains that followed the release of US November employment data, as new jobs rose more than expected. Gold for February delivery closed down $5.60 to US$1,809.60 per ounce, after earlier falling to US$1,791.80.

WTI crude oil closed with a loss on Friday ahead of Sunday's OPEC+ meeting and as Europe agreed to a price cap for Russian oil. WTI crude oil for January delivery closed down $1.24 to US$79.98 per barrel. February Brent crude, the global benchmark, was last seen down $1.33 to US$85.55, while Western Canada Select was down $1.14 to US$50.94 per barrel.

Among sectors, Healthcare posted one of the biggest gains as it was up near 5% today, followed by Battery Metals Index, which was up 2.4%. Meanwhile, Info Tech and Financials were down today by near 0.7% and 0.3%, respectively.

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