U.S. Stocks Hit Pause Button as Inflation Reaches Three-Decade High

Market Watch – November 12, 2021

November 18, 2021

U.S. markets reached record highs on Monday, with modest gains for the Dow, S&P 500 and Nasdaq.

Meanwhile, the TSX hit a record close for the third straight day, buoyed by cannabis stocks, which soared higher after reports of a Republican-led bill to legalize marijuana in the U.S. By Monday’s close, the TSX had added 101 points. Also boosting sentiment was last Friday’s passage in the U.S. House of a $1-trillion infrastructure bill, after months of delay.

U.S. markets, however, retreated from record levels Tuesday, snapping an eight-day winning streak for the S&P 500. While all three U.S. markets recorded minor losses, the TSX inched up to another record high on Tuesday, led by more defensive sectors, such as utilities and consumer staples.

In economic news Wednesday, U.S. inflation hit a three-decade high in October, climbing at a 6.2% annual rate, as strong consumer demand and supply-chain shortages continued to drive higher prices. It was the fifth consecutive month that inflation has exceeded 5%. The core price index, which excludes food and energy, climbed 4.6% in October from a year earlier, topping September’s 4% rise.

Rising inflation and the prospect of early rate hikes from central banks was bad news for North American markets. By Wednesday’s close, the TSX lost 132 points, with the tech sector dropping more than 3%. In the U.S., the Dow dropped 240, while the S&P 500 and Nasdaq lost 38 and 264, respectively. However, it was a strong day for gold, which rallied in light of the inflation news.

It was mostly a bounce-back day for North American markets, as investors had time to digest Wednesday’s inflation reading. The TSX climbed 120 points, buoyed the materials sector and rising gold prices, while the Nasdaq added 82 points, as key tech names rebounded. While the S&P 500 finished flat, the Dow was slightly off, dropping 130 points.

This morning, the U.S. Bureau of Labor Statistics reported Job Openings and Labor Turnover Survey (JOLTS) that were little changed in September at 10.4 million from August’s figure of 10.6 million, but easing slightly from July’s record high of ~11.1 million. Although vacancies have declined for a second consecutive month, they remain elevated compared to historical levels as workers, particularly in high-contact jobs, remain hesitant to return to the workplace over health and safety concerns or due to caregiver and childcare responsibilities. However, the combination of schools reopening and the expiry of federal enhanced unemployment benefits in early September, along with the diminishing impact from the Delta variant, may help attract people back to the workforce.