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Bond yields bite back, and Canada takes the bigger hit

The day in one line: Stocks slipped from records on Wednesday as US bond yields touched their highest level since 2002 and Fed minutes pointed to another rate hike this year; the TSX fell 1.7%, its worst day in a month. Overnight, oil jumped on record tanker attacks near the Strait of Hormuz and a hurricane heading for the Gulf Coast, and US futures are lower.

What moved and why

1. A mild day in New York, a rough one for small companies. The S&P 500 fell 17.16 points, or 0.22%, to 7,801.77, a day after its record close. The Nasdaq also fell 0.22% (61.20 points) to 27,538.69. The Dow lost 341.41 points, or 0.66%, to 51,179.87. The Russell 2000, which tracks smaller companies, fell 1.31% to 2,793.20. Smaller firms tend to borrow more, so they feel higher rates first. This morning, S&P 500 futures are down about 0.5%, Dow futures about 0.8% and Nasdaq futures about 0.7%.

2. The 10-year yield hits a 24-year high, intraday. The US 10-year Treasury yield rose as high as 5.36% on Wednesday, the highest since April 2002, before closing at 5.28%. The 30-year yield touched 5.73% and closed at 5.66%. When safe government bonds pay this much, stocks have to work harder to look attractive. This morning the 10-year is little changed near 5.28%. A US$22 billion auction of 30-year bonds this afternoon will test how much demand there is at these levels.

3. The Fed's minutes: most officials expect one more hike. Minutes from the Fed's September 15–16 meeting, when it raised its key rate a quarter point to about 3.9%, showed most officials think another increase will likely be needed this year. Several said rates are still too low to slow the economy. The minutes point to stubborn inflation: prices rose 3.4% in the year to August, and 3% excluding food and energy, above the Fed's 2% goal. Higher oil, tariffs and AI-driven price spikes for chips and electrical parts were all named. Futures markets expect a hold at the October 28–29 meeting and a hike in December.

4. Oil jumps again overnight. On Wednesday, November US crude settled down US$1.16 at US$88.28 a barrel. Overnight, it jumped more than 4% to about US$92, and Brent, the global benchmark, rose above US$104, according to CNN. Some of that gain appeared to fade by 8:30 a.m. ET. Two reasons: Kpler counted a record 10 tankers struck in the week to October 4, and only seven tankers crossed the Strait of Hormuz on Tuesday, the fewest since late July. Separately, a storm forecast to reach the Gulf Coast as a hurricane by Friday has led Shell and Chevron to curb output and evacuate nonessential staff. US diesel averages US$6.28 a gallon and regular gasoline US$4.36, per AAA.

5. Industrials stumble; a broker sells off. Caterpillar fell about 6%, the biggest drag on the Dow, after an analyst downgrade and doubts about AI-related demand. Deere slid after news of a federal inquiry into business practices in farm equipment. Webull, an online brokerage, dropped about 20% after a congressional committee raised concerns about its ties to China. Industrials and materials were the weakest sectors; health care and consumer staples gained.

6. PepsiCo beats, but trims its outlook. This morning PepsiCo reported third-quarter revenue of US$25.27 billion, up 5.6% from a year ago, and adjusted earnings of US$2.34 a share. Both beat forecasts. It also lowered its full-year profit growth forecast because its North American business keeps lagging. Shares were up about 1% to 2% before the open. Gold, meanwhile, fell US$46.40 to US$4,140.70 an ounce on Wednesday and is flat to slightly higher this morning near US$4,148.

Canada corner

TSX: worst day in a month. The S&P/TSX Composite fell 607.65 points, or 1.70%, to 35,041.86, a one-month low. Decliners outnumbered gainers by almost two to one (637 to 330). Materials, financials and industrials led the drop.

Why Canada fell harder than the US. The TSX is heavy in banks and miners, and both were hit. Higher yields raise worries about loan losses and slower lending, and Canadian government bonds fell too. TD Bank fell 3.3% and Royal Bank 2.3%. Lower gold prices pulled down miners: Barrick fell 3.6% and Agnico Eagle 2.8%. Oil producers gave up early gains as crude turned lower in the afternoon: Imperial Oil fell 2% and Cenovus 1.8%.

Biggest movers. Fortuna Mining fell 9.1%, BlackBerry 8.4% (after jumping 5.5% on Tuesday) and Energy Fuels 8.3%. On the plus side, Extendicare rose 4.2%, Bausch Health 2.7% and Open Text 2.2%.

The loonie. The Canadian dollar closed at 70.14 US cents, down from 70.29 on Tuesday. This morning it trades near C$1.426 per US dollar, about unchanged. A wider gap between US and Canadian interest rates keeps pulling money toward the US dollar.

Rates. Canada's 10-year yield rose to about 3.95%, still well below the US 10-year at about 5.28%. According to Trading Economics, markets now price in at least one quarter-point Bank of Canada rate hike by year-end.

Trade pressure. A US ban on nearly US$1 billion a year of Canadian imports, covering alcohol, dairy and some motorcycles, has been in effect since September 29. Quebec's BRP says its three-wheel Can-Am Spyder and Canyon models are affected, though it expects the main impact in 2027.

Coming up: Canada's September jobs report on Friday at 8:30 a.m. ET (forecast: about 9,500 new jobs, with unemployment edging up to 6.5% from 6.4%).

One thing to understand: why rising bond yields can pull stocks down

A bond yield is the yearly return you get for lending money to a government or company. When the US 10-year yield is 5.28%, you can earn that by lending to the US government for 10 years, with very little risk of not being paid back.

That matters for stocks in three ways.

  1. Competition. If a safe bond pays over 5%, some investors move money out of riskier stocks and into bonds.
  2. Borrowing costs. Higher yields push up interest rates on loans and mortgages. Companies that borrow a lot, such as smaller firms, pay more, which can cut into profits. That is one reason the Russell 2000 fell six times as much as the S&P 500 on Wednesday.
  3. Future profits are worth less today. Investors value a stock by adding up the profits they expect in the future. The higher the interest rate, the less a dollar earned years from now is worth today. Fast-growing companies whose profits are far in the future feel this the most.

Yields rise when investors expect more inflation or more rate hikes from the central bank. Both were in the news on Wednesday.

On the calendar

Today (Thursday, October 8)

Friday, October 9

Later this month: Federal Reserve decision October 28–29. The Bank of Canada also decides later this month.

Sources

This newsletter is general information, not investment advice.

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