The Fed's Relief Rally Lasted One Session
Thursday's rebound reversed Wednesday's post-hike dip in full. The TSX Composite closed at 35,874.26, up 382.99 points or 1.08 per cent, after the Federal Reserve raised its target rate 25 basis points to 3.75 to 4.00 per cent, its first increase in more than three years, and dropped language tying inflation to an energy supply shock. Oil eased alongside it, with WTI settling near $101.91 US a barrel as Saudi Arabia moved to restore its East-West pipeline within six weeks.
Friday gave most of that gain back. The TSX traded down 196.42 points to 35,677.84 in late morning dealing, even as WTI extended its decline to roughly $100.53 and Brent fell 1.6 per cent to about $103. Kansas City Fed President Jeffrey Schmid publicly endorsed Wednesday's hike Friday morning, and Government of Canada 10-year yields, which had eased from a near 4 per cent high earlier this week, ticked back toward 3.88 per cent. Oil kept falling. Yields did not follow it down. That break is the day's real signal, not the index level on its own.
The same-session data below shows how unevenly that split ran across asset classes rather than only within equities.
The index gave back roughly half of Thursday's 382.99-point post-Fed rebound by late Friday morning, even as oil kept falling through the same session.
A roughly $7 trillion options expiry, the second largest quadruple witching event on record, landed on the same session, which widens the range of any single day's move without changing which direction the underlying pressure is coming from.
Gold Is Not Reading the Same Yield Curve the TSX Is
Gold traded near $4,393 US an ounce Friday, up about 1 per cent and extending Thursday's roughly 2 per cent advance to sit within striking distance of its record. The move happened on a day when both the US 10-year and the GoC 10-year yield rose, not fell. That is the wrong direction for gold under the relationship that has held for most of this cycle: a non-yielding asset should lose ground when the return on holding yield-bearing alternatives goes up.
The more useful read is that gold stopped answering to the level of yields somewhere around Wednesday's hike and started answering to the market's confidence in where the Federal Reserve's rate path actually goes from here. Coverage of Wednesday's vote described a fractured committee behind the 25-basis-point move, with disagreement over how much further the tightening cycle has to run. That kind of internal division is exactly what a safe-haven bid responds to, independent of where yields happen to sit on any given day.
Gold and silver rose the same day both Government of Canada and US Treasury yields moved higher, breaking from the inverse relationship that held through most of the post-hike week.
For a portfolio holding gold as a hedge, this changes what the position is actually protecting against this week. It is behaving less like a real-rate trade and more like a bet on Federal Reserve conviction, and those two drivers do not move together.
The Loonie Priced In a BoC Hike and Still Lost Ground
Odds of a Bank of Canada rate increase at the October 28 meeting swung sharply this week, from roughly 94 per cent in favour of a hold ahead of the September 2 decision to a coin flip, with a narrow lean toward a hike as of Thursday afternoon. That is a genuine, market-moving repricing of Canadian policy, not noise.
It did not help the Canadian dollar. USD/CAD held just under 1.4000 Friday, a level not seen since early August, as the Federal Reserve and Bank of Canada policy rate gap widened back to roughly 175 basis points. The US dollar's own strength from Wednesday's hike outweighed the domestic hawkish shift entirely.
The mechanism that actually matters for imported-goods inflation is the exchange rate itself, and it has not moved in Canada's favour this week despite the rate market's repricing. The rate market moved. The currency did not follow it.