Warsh Signals Possible Further Action Against Inflation

CANADIAN STOCKS DROPPED FRIDAY after US Fed Chair Kevin Warsh's speech at Jackson Hole, signaling that central banks may need to take further action against inflation.

The S&P/TSX Composite Index fell by half a percentage point as investors weighed the implications of Warsh's remarks. The index's materials sector, which has significant exposure to gold stocks, dropped 1.5% as spot gold prices declined over 1% to $4,551.10 an ounce.

The speech sparked a surge in US Treasury yields, with the two-year note yield rising 5.36 basis points to 4.286%, and expectations for a rate hike at the Fed's September meeting jumped to about 50%. The dollar index rose 0.46% to 99.57.

Economist Stephen Brown of Capital Economics noted that Warsh's speech was 'far clearer, and hawkish, message than his last press conference appearance', leaving open the possibility of an earlier rate hike if inflation data remains firm.