Global Markets Face Significant Decline Amid Federal Reserve Uncertainty
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Global stock markets recorded their steepest weekly drop in two months, while US Treasury yields surged to a five-and-a-half-month peak on Friday. Recent economic data and insights from Federal Reserve officials suggested a tempered approach to interest rate cuts, according to Reuters.
Fed Chair Jerome Powell’s comments on Thursday set the tone for the shift, as he indicated that the central bank would not hastily pursue further rate reductions amid continued economic growth, a strong job market, and inflation remaining above the 2% target.
On Friday, the US Commerce Department reported retail sales increased by 0.4% in October, outpacing economists’ forecasts of a 0.3% gain. This uptick followed a revised 0.8% increase in September. Conversely, the Labor Department noted that import prices unexpectedly climbed 0.3% in October, reversing September’s decline of 0.4%, primarily due to rising fuel and goods prices.
Adam Rich, deputy chief investment officer for Vaughan Nelson, remarked to Reuters, “In the last 48 hours we’ve had some pretty big changes, not just from the election but from economic data that was better than expected and Powell speaking about not having to be as aggressive on interest-rate cuts.” He elaborated that market expectations for interest-rate cuts have notably decreased as investors reevaluate responses to the U.S. election results.
Initially, equities surged following the US presidential election, driven by expectations that President-elect Donald Trump’s policies would boost the economy through higher tariffs, tax reductions, and deregulation. However, as time progressed, these gains have retreated as the market reassesses the Fed’s strategy and the implications of potential legislative changes.
Wall Street reflected this uncertainty, with the Dow Jones Industrial Average dropping 0.70%, the S&P 500 declining by 1.32%, and the Nasdaq Composite falling by 2.24%. For the week overall, the S&P 500 fell 2.08%, the Nasdaq slipped 3.15%, and the Dow lost 1.24%.
Further complicating the outlook for rate cuts, additional Fed officials offered comments on Friday that increased uncertainty about the timing and depth of future reductions.
MSCI’s global stock gauge fell by 1%, marking its fourth consecutive drop and the largest weekly percentage loss since early September. In Europe, the STOXX 600 index ended down by 0.77%, though it managed a small weekly gain.
Not only are bond yields and the dollar increasing amid optimistic growth expectations, but concerns that Trump’s policies may reinvigorate inflation also circulate, possibly changing the Fed’s monetary easing strategy.
On Friday, the dollar index fell 0.12% but is set for its largest weekly rise since early October. The dollar weakened against the Japanese yen by 1.24% and fell 0.45% against the British pound.
Anticipations for a 25-basis-point rate cut during the Fed’s December meeting have dwindled to 58.4%, a decrease from 72.2% in the previous session and 85.5% a month earlier, as noted by CME’s FedWatch Tool.
The yield on benchmark US 10-year notes rose by 1.9 basis points to 4.439%, reaching an earlier high of 4.505%, the highest level since May 31.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
