Markets Fall Sharply as Fed Signals Caution on Rates
The S&P 500 Index ($SPX) (SPY) closed down -2.95% on Wednesday, with the Dow Jones Industrials Index ($DOWI) (DIA) down -2.58%, and the Nasdaq 100 Index ($IUXX) (QQQ) falling by -3.60%. Additionally, December E-mini S&P futures (ESZ24) dipped by -3.14%, and December E-mini Nasdaq futures (NQZ24) decreased by -3.97%.
Stock Decline Accompanied by Rising Bond Yields
On Wednesday, stock indexes faced a significant downturn. The S&P 500 hit a four-week low, while the Dow Jones Industrials reached a six-week low, and the Nasdaq 100 fell to a two-week low. The U.S. bond yields surged even after the Federal Open Market Committee (FOMC) reduced the federal funds target by -25 basis points, suggesting only 50 basis points of cuts next year—less than the 100 basis points previously predicted in September. The FOMC also upgraded its U.S. GDP and inflation forecasts, indicating a stricter monetary policy ahead. Stock prices plummeted further when Fed Chair Powell mentioned that the FOMC would take a more cautious approach in adjusting policies, hinting that tighter conditions might persist longer.
Housing Data Mixed Amid Economic Signals
Housing news released on Wednesday offered a mixed picture. November housing starts unexpectedly dropped by -1.8% month-over-month, landing at 1.289 million, which was lower than the anticipated rise to 1.345 million. Conversely, November building permits surged by +6.1% month-over-month to a nine-month peak of 1.505 million, surpassing expectations of 1.430 million.
Deficits and Mortgage Trends
The U.S. current account deficit for Q3 reached a record -$310.9 billion, wider than the projected -$287.1 billion. Meanwhile, mortgage applications fell by -0.7% for the week ending December 13. While the purchase mortgage sub-index increased by +1.4%, the refinancing sub-index fell by -2.6%. The average 30-year fixed mortgage rate rose by +8 basis points to 6.75%, up from 6.67% the week before.
Future Projections From the FOMC
The FOMC cut the fed funds target range by -25 basis points to 4.25%-4.50%, stating that the risks to labor and inflation are balanced. According to the Fed’s dot plot, the median projected fed funds rate for the end of 2025 is now estimated at 3.875%, an increase from 3.375% in September, indicating only two anticipated 25 basis point cuts next year.
Updated Economic Forecasts
Recent forecasts from the FOMC included an upgrade to the 2024 U.S. GDP estimate to 2.5% from 2.0% in September and for 2025, which is now projected at 2.1% compared to 2.0%. Additionally, the unemployment rate for 2024 is now expected to be 4.2%, revised down from 4.4%, and the estimate for 2025 has also been lowered to 4.3% from 4.4%. Furthermore, the core PCE inflation forecast has been raised to 2.8% for 2024 and 2.5% for 2025, both up from earlier expectations.
Awaiting Key Inflation Data
Fed Chair Powell emphasized the need for a restrictive monetary policy to tackle inflation. Markets are looking towards key inflation data set to be released on Friday, particularly the November core PCE price index, the Fed’s favored measure for inflation, which is expected to climb to +2.9% year-over-year from +2.8% in October. Currently, the markets anticipate a mere 6% chance of a -25 basis point cut during the January 28-29 FOMC meeting.
Global Market Responses
Overseas markets ended mixed. The Euro Stoxx 50 saw a gain of +0.30%, and China’s Shanghai Composite rose by +0.62%. In contrast, Japan’s Nikkei Stock 225 dipped to a one-week low, ending down -0.72%.
Bond Market Reactions
March 10-year T-notes (ZNH25) closed down -28.5 ticks, with the 10-year T-note yield increasing by +10.3 basis points to 4.502%. The T-note prices fell steeply due to the Fed’s rate cut signal and the upward revisions to GDP and inflation estimates. These moves pressured T-notes as well as hawkish comments from Powell, necessitating a restricted policy to meet inflation goals. European government bond yields also rose, with the 10-year German bund yield rising by +1.5 basis points to 2.245% and the 10-year UK gilt yield climbing to a five-week high of 4.577%.
Swaps and Predictions
Swaps currently show a 100% chance for a -25 basis point rate cut by the ECB at its January 30 meeting, along with a 14% chance for a -50 basis point cut.
Highlights in U.S. Stock Movements
Chip stocks, including Broadcom (AVGO) and Marvell Technology (MRVL), lost early gains, each dropping more than -6%. Intel (INTC) also fell by over -5%. Major tech names followed suit, with Tesla (TSLA) down more than -8% and Amazon.com (AMZN) experiencing a decline of over -4%. Notably, Cigna Group (CI) rose by more than +6%, leading gains among health insurers, while Jabil Inc (JBL) surged over +7% after reporting strong earnings.
Upcoming Earnings Reports
Upcoming earnings reports on December 19, 2024 include Accenture PLC (ACN), CarMax Inc (KMX), Cintas Corp (CTAS), Conagra Brands Inc (CAG), Darden Restaurants Inc (DRI), FactSet Research Systems Inc (FDS), FedEx Corp (FDX), Lamb Weston Holdings Inc (LW), NIKE Inc (NKE), and Paychex Inc (PAYX).
On the date of publication, Rich Asplund did not hold positions in any of the mentioned securities. All information in this article is for informational purposes only. For more details, please view the Barchart Disclosure Policy here.
The views expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
