Brent crude gained 6.2% this week, to US$116.72 a barrel, and the S&P/TSX Composite fell 1.1%, to 35,788.20. Canada is a net oil exporter, and the index did not behave like one. The oil shock reached Canadian markets as a Bank of Canada rate decision, and the TSX followed the rate story rather than the barrel.
The Barrel Rose and the Index Did Not
Brent has risen 9.5% since September 24, from US$106.60 to US$116.72. The S&P/TSX Composite has returned 0.2% over the same stretch. The gap opened almost entirely this week: on October 16 Brent stood 3.1% above its September 24 level and the TSX 1.3% above, and by October 23 the figures were 9.5% and 0.2%.
The divergence between Brent and the S&P/TSX Composite widened from 1.7 index points on October 16 to 9.3 on October 23, with almost all of the change arriving in five sessions.
Brent closed at US$116.72 on October 23 and the TSX at 35,788.20; the dashed vertical lines mark the October 19 hike-odds repricing and the October 22 Nasdaq selloff. Both series are indexed to their September 24 closes.
Gold sharpened the split. Futures fell 4.1% on the week, from US$4,181.10 to US$4,007.90 an ounce, including a US$89.60 drop on Thursday, the day the TSX lost 0.97% and the Nasdaq fell 2.6%. The S&P 500 slipped only 0.5% over the five sessions, so the Canadian decline was not simply an import of Wall Street weakness.
The channel was not earnings. It was the price of money. A barrel at US$116.72 raises revenues for Canadian producers, but the same barrel raised the odds that the Bank of Canada tightens into a shrinking labour market, and a higher policy rate weighs on valuations across the index. Both effects were live this week, and the price action is consistent with the second one dominating.
A Hike Priced Through a Soft Inflation Print
Swap pricing for a Bank of Canada increase on October 28 moved from roughly 35% on October 16 to roughly 80% on October 19, according to Bloomberg data reported by Canadian Mortgage Trends. BMO, RBC Dominion Securities and Desjardins have since called for a move to 2.50% from 2.25%. Estimates vary by venue, from about 54% to 87%.
The repricing came on the same Monday that Statistics Canada reported September CPI-trim at 1.8%, below the 1.9% consensus and below the 2% target, with CPI-median at 1.9%. Headline CPI reached 3.1%, with gasoline up 27.8% from a year earlier. Canada also lost 68,000 jobs in September, the second monthly decline in a row.
In a speech last month, Governor Tiff Macklem said the Bank can look through the direct effect of higher oil prices while pressures stay contained, as reported by InvestingLive. A hike priced near 80% therefore implies the market expects the Bank to judge those pressures no longer contained, even as core inflation undershoots.
The Canadian 2-year yield recorded the move, rising 12 basis points on October 19, from 3.21% to 3.33%, and then reversing most of it by October 22. The yield ended the stretch at 3.22%, one basis point above its October 16 level.
The yield rose 12 basis points on October 19, the day September CPI-trim printed at 1.8% against 1.9% expected, and fell 10 on October 22. The October 23 yield had not been published at the time of writing, and the dashed line marks the October 16 level.
Two Decisions on One Day, With Oil Priced Differently in Each
The Bank of Canada announces at 9:45 a.m. ET on October 28, alongside a new Monetary Policy Report, and the Federal Reserve follows at 2:00 p.m. The same oil shock sits behind both decisions, and the markets have priced it in opposite directions.
Fed hike odds fell to about 5% from 37% at the end of September, according to fed funds futures reported by Yahoo Finance from Bloomberg data. The AI-led selloff on Thursday did most of that work: the Nasdaq fell 2.6%, the U.S. 2-year yield fell 16 basis points to 4.65%, and the Canadian 2-year fell 10 basis points to 3.22%.
Ottawa is being priced on oil and inflation expectations, Washington on an equity scare. The Canadian dollar has started to register the difference: USD/CAD slid to about 1.4004 from about 1.4119 over the week, a 0.8% gain for the loonie, which trimmed Brent to a 5.4% rise in Canadian dollars against 6.2% in U.S. dollars.
The Monday open is the first test. A Canadian 2-year yield above 3.22% and gold below US$4,000 would confirm that rate pricing, not crude, is setting the direction of the TSX. A TSX that follows Brent higher would mean the market has stopped treating the hike as the main event.