Mar 10 – At midday: TSX set for worst week in five months as rate hike worries mount

Canada’s benchmark stock index extended losses on Friday, dragged down by banks, after data reflecting a resilient labor market refueled investor concerns on whether the Bank of Canada (BoC) would keep its monetary tightening campaign suspended.

A Statistics Canada report showed that the economy added a net 21,800 jobs in February, compared with 150,000 additions in the previous month. Analysts polled by Reuters had forecast a net gain of 10,000 jobs.

At 10:27 a.m. ET, the Toronto Stock Exchange’s S&P/TSX composite index was down 132.38 points, or 0.66%, at 19,954.34.

“The data points to a strong labor market and that stresses the need that the BoC may still need to raise interest rates further,” said Angelo Kourkafas, investment strategist at Edward Jones Investments.

Money markets are almost fully pricing in another rate hike by September.

The rate-sensitive financials sector slumped 1.4% to a two-month low, while banks fell 1.3%.

The impact on banks is a global concern on whether the financial system is starting now to feel the effects of the prior rate hikes by central banks, Kourkafas said.

Across the border, U.S. stock indexes fell on a selloff in bank shares after SVB Financial’s efforts to raise capital sparked worries about the sector’s health.

The TSX is heading for its worst week in five months, with all of its 10 major sectors in the red, as mixed economic data from China, uncertainty on the outlook for interest rate hikes and a global rout in the financial sector wiped out any appetite for risk among investors.

Among company news, Bank of Montreal shed 1.2% after it said it would acquire Loyalty Ventures’ subsidiary’s rewards program AIR MILES for an undisclosed amount. Loyalty Ventures fell 54.2% in U.S. trading.

Stocks are dipping Friday as worries about the banking system outweigh a highly anticipated report that showed pay raises for workers are slowing and other signals Wall Street wants to see of cooling pressure on inflation.

The S&P 500 was 0.2% lower in midday trading after paring a sharper morning loss. The Dow Jones Industrial Average was up 46 points, or 0.1%, at 32,301,while the Nasdaq composite was 0.3% lower.

Some of the market’s sharpest drops were coming from the financial industry, where stocks tanked for a second day.

SVB Financial, a Silicon Valley bank that caters to the industry surrounding startup companies, has plunged more than 60% this week as it raises cash to relieve a crunch. Analysts have said SVB Financial is in a relatively unique situation, but it’s still led to concerns a broader banking crisis could erupt. SVB’s stock was halted Friday morning.

Friday’s struggles come amid what strategists in a BofA Global Research report called “the crashy vibes of March.” Markets have been twitchy recently on worries that high inflation is proving difficult to drive down, which could force the Federal Reserve to reaccelerate its hikes to interest rates.

Such hikes can undercut inflation by slowing the economy, but they also drag down prices for stocks and other investments and raise the risk of a recession later on.

Wall Street already in February gave up on hopes that cuts to interest rates could come later this year. Worries then flared higher this week that rates are set to go even higher than expected after the Fed said it could reaccelerate the size of its rate hikes.

Friday’s jobs report helped calm some of those worries. Overall hiring was hotter than expected, which could be a sign the labor market remains too strong for the Fed’s liking despite the fastest set of rate hikes in decades.

But the data also showed a slowdown from January’s jaw-dropping hiring rate. More importantly for markets, average hourly earnings for workers rose by 0.2% in February from January.

That was a slowdown from January’s 0.3% gain, and it was lower than the 0.4% acceleration that economists expected. This number is crucial on Wall Street because the Fed is focusing on wage growth in particular in its fight against inflation. It worries too-high gains could cause a vicious cycle that worsens inflation, even though raises help workers struggling to keep up with rising prices at the register.

Among other signs of a cooling but still-resilient labor market, the unemployment rate ticked up and the percentage of Americans with or looking for jobs edged up by a tiny bit.

Another potential sign of easing inflationary pressure is that “we’re no longer seeing the massively widespread job gains,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “Gains are getting more concentrated and that’s an early signal that the labor market momentum is fading.”

Such trends mean traders are swinging back their bets for the size of the Fed’s next rate increase.

After earlier in the week thinking the central bank would go back to a hike of 0.50 percentage points later this month, traders are now betting on a 57% probability that it will stick with a more modest 0.25 point hike, according to CME Group.

Last month, the Fed slowed to that pace after earlier hiking by 0.50 and 0.75 points.

The expectations, along with worries about banks, helped send Treasury yields sharply lower.

The yield on the 10-year Treasury plunged to 3.68% from 3.91% late Thursday, a sharp move for the bond market. It helps set rates for mortgages and other important loans.

The two-year Treasury yield, which moves more on expectations for the Fed, fell to 4.64% from 4.87%. It was above 5% earlier this week and at its highest level since 2007.

Some of the sharpest drops on Wall Street came from banking stocks on worries about who else may suffer a cash crunch if interest rates stay higher for longer and customers pull out deposits. That would set up pain because a flight of deposits could force them to sell bonds to raise cash, right as higher interest rates knock down prices for those bonds.

Besides SVB Financial’s struggles, Silvergate Capital also said this week it’s voluntarily shutting down its bank. It served the crypto industry and had warned it could end up “less than well-capitalized.”

Stock losses were heaviest at regional banks. First Republic Bank tumbled 12%, and Signature Bank dropped 8.4%.

Charles Schwab lost another 6.3% after dropping 12.8% Thursday “as investors stretched for read-throughs” from the SVB crisis, according to analysts at UBS. The analysts called them “logical but superficial” because of differences in how companies get their deposits.