04:36 PM EDT, 08/23/2024 (MT Newswires) -- The Toronto Stock Exchange, Canada's largest stock market closed at a record high on Friday, spurred by rising commodity prices and Federal Reserve Chair Jerome Powell's comments the central bank is ready to begin cutting interest rates, which would limit divergence with the Bank of Canada, which is already on a rates cut path and is expected to skip even further along it in September.

The S&P/TSX Composite Index closed up 248.61 points or 1.1%, to 23,286.08, topping the previous record close of 23,121.73 set on Wednesday. Among sectors, most were higher, led by base metals up more than 2%. The Battery Metals Index was down more than 2.1%.

The main factor behind the gains was the news out of the Fed dovish turn, seen as limiting divergence on rates because lower Canada rates would pressure the Canadian dollar against its U.S. counterpart, driving up the cost of imported goods and adding to inflation pressures.

The U.S. dollar fell sharply against the Loonie on Friday, falling by more than US$0.01 to C$1.3511 from C$1.3616 a day earlier.

The Canadian economy faces enough other potential inflationary pressures, not least through the nation's biggest rail companies as rail workers pushed back against the federal government's move yesterday to force them into binding arbitration to resolve a labor dispute. The rail workers have threated new strike action and a regulatory challenge. This dispute has already halted freight shipments and disrupted business and commuter travel across the country.

CIBC, for its part, this week estimated that a one-week rail lockout would lower annualized Q3 GDP by around 0.4 percentage points, with the impact more than doubling in the case of a two-week dispute as more sectors would be forced to curtail production the longer the lockout persists.

According to CIBC, the direct impact on the economy is "relatively small". Rail transportation accounts for just under 0.5% of GDP, so a one-week shutdown which takes activity in this segment to almost zero during that period, would shave only roughly 0.1% from monthly GDP, and 0.13%-points annualized from Q3 assuming rail transportation volumes rebound in September. "But that's far from the full story," CIBC said, noting the indirect effect on the economy would likely be much larger, particularly if the dispute goes beyond a week.

Meanwhile, in terms of the U.S., and in potential good news for Canadians, successive Fed rate cuts of 25 bps can be expected in September, November and December, according to a Macquarie economist.

David Doyle, head of economics at Macquarie, noted that Fed Chair Powell during his speech at Jackson Hole, Wyoming, provided a clear signal of a September cut with the key line: "The time has come for policy to adjust." This, Doyle said, further assures near-term policy action after the Minutes from July's meeting of the central bank's policy committee also outlined an appetite for easing amongst participants.

Doyle added: "The sequencing and focus of Powell's speech was telling. The labor market was more prominent (and inflation less so) than in previous communications. This is the culmination of a trend in rhetoric that has built in recent months. It is a reflection of the continued evidence of disinflation as well as the recent softness in the labor market. Powell made clear that the timing and pace of cuts would depend largely on the incoming data. In our view, employment reports will be of particular importance in shaping the policy trajectory with the FOMC likely to be sensitive to any further rise in the unemployment rate."

Macquarie's baseline is for successive cuts of 25 bps in each of September, November, and December. Should the labor market and growth prove less resilient than we anticipate, more substantial policy easing would be likely, Doyle said.

On commodities, West Texas Intermediate crude closed higher, advancing for a second day after the Fed update. WTI crude for October delivery closed up US$1.82 to settle at US$74.83 per barrel, while October Brent crude, the global benchmark, closed up US$1.80 to US$79.02.

Gold prices rose on Friday following two days of losses as the dollar and treasury yields were sharply lower after Jerome Powell confirmed market expectations and said the central bank is ready to begin cutting interest rates. Gold for December delivery was last seen up $30.60 to US$2,547.30 per ounce, near Tuesday's record close of US$2,550.60 per ounce.