TSX Trends Lower as Canadian Economy Heats Up, Sparking Concerns of a Rate Hike

The Toronto Stock Exchange, Canada’s main stock index, is trading at its lowest level since March, as crude oil prices face headwinds and economic data out of Canada and the U.S. could force the Bank of Canada and Federal Reserve to raise interest rates even higher to cool stubbornly high inflation.

The Toronto Stock Exchange’s S&P/TSX composite index finished out the month of May down 5.2%, the biggest monthly loss in 2023. On the plus side, the TSX has eked out a 1.7% gain year-to-date.

Investors are increasingly pessimistic about weakening oil prices; energy accounts for 9.7% of Canadian GDP. Meanwhile, central banks have been aggressively raising their interest rates to tame inflation, but it’s not working. This suggests the Federal Reserve will raise its interest rates when it meets next and could force the Bank of Canada to follow suit.

The Bank of Canada’s key interest rate is at 4.5%, the highest level since 2007. The U.S. interest rate is in a range of 5.0% to 5.25%, its highest level since 2007.

What Is Canada’s GDP?

On May 31, Statistics Canada reported that the Canadian economy grew faster than expected in the first quarter, at an annualized rate of 3.1%. This hot number topped Bay Street calls for annualized first quarter GDP of 2.5% and beat Statistics Canada’s forecast of 2.3% growth.

Despite eight consecutive interest rate hikes in 2022 and 2023, Canadian consumers continue to spend and businesses continue to hire, keeping the country’s unemployment rate near record lows. The ongoing strength of the Canadian economy raises the chances of another rate hike when the Bank of Canada meets next in early June.

Meanwhile, south of the border, the labour market remains resilient, with job openings climbing and layoffs dropping. The U.S. Federal Reserve has been doing everything it can to cool the economy, raising interest rates 10 times in the last 14 months, but it’s not working either.

U.S. job openings rose unexpectedly in April, with employers posting 10.1 million job openings, up from 9.7 million in March, and the most since January. Wall Street was looking for vacancies to drop to less than 9.5 million.

Deliberate attempts to tame inflation with higher interest rates and achieve a so-called soft landing for the economy isn’t having the desired effect. This points to additional interest rate hikes from both the Federal Reserve and Bank of Canada. Moves that economists believe will tip the economy into a recession later this year.

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Also Read: Bank of Canada Raises It’s Interest Rates While Federal Reserve Hits Pause