Nasdaq falls 2%, S&P, Dow drop as Wall Street rethinks pace of rate cuts
Major averages dropped Friday as Wall Street reassessed what’s next for the Federal Reserve’s rate-cutting cycle, driving stocks further into the red for the week following a massive advance fueled by Donald Trump’s re-election as U.S. president.
Traders in the fed funds futures market were increasing odds of the Fed standing pat on interest rates next month and in January after Federal Reserve Chair Jerome Powell on Thursday sent hawkish signals in prepared remarks at an event in Dallas. Odds still remained in favor of a quarter-point cut in December. Stocks finished Thursday’s session lower.
On Friday, the Nasdaq Composite (COMP:IND) -2%, the S&P 500 (SP500) -1.2%, and the Dow (DJI) -0.6%. Seven of the 11 sectors on the benchmark (SP500) fell, led by Information Technology -2.1%. Utilities topped gainers. All indexes were facing weekly losses, with the Nasdaq (COMP:IND) sliding down nearly 3%.
“The economy is not sending any signals that we need to be in a hurry to lower rates,” Powell said. He spoke following two key inflation readings this week. Headline and core consumer and producer price index readings for October matched expectations of rising M/M, and on a Y/Y basis remained hot.
“Federal Reserve Chair Jerome Powell managed to spook markets during a speech and Q&A session last night,” David Morrison, senior market analyst at Trade Nation, said. “So, once again, there’s plenty of uncertainty building ahead of the December meeting. The Fed can blame this on recent data, particularly this week’s CPI and PPI releases, but also on what a Trump administration may mean for the U.S. economy.”
U.S. Treasury yields were mixed on Friday. The benchmark 10-year yield (US10Y) was up 2 basis points to 4.46%, while the shorter-end, more rate-sensitive 2-year yield (US2Y) was down 3 basis points to 4.33%.
Odds of the Fed leaving the fed funds rate at 4.50%-4.75% in December rose to ~38% from ~28% on Thursday, according to the CME FedWatch tool. The probability of the Fed standing pat in January picked up to 26.5% from ~19% a day earlier.
For more, see how Treasury yields have done across the curve on the Seeking Alpha bond page.
“Even though it appeared that both Trump and Powell were in favor of lower rates – the former to goose the economy, the latter to ease the pain of the $1.5T of real estate loans which reset next year – it’s possible that Powell’s hawkish tilt will put the pair back on a collision course, reminiscent of their clash during Trump’s first term,” Morrison added.
JPMorgan’s Michael Feroli believes that the Fed’s monetary policy committee is still likely to cut rates at its meeting in December. However, Powell’s speech on Thursday “opens the door to dialing down the pace of easing as soon as January.”
Investors on Friday received the October retail sales report. Headline retail sales improved +0.4% M/M, higher than the consensus of +0.3%. Core retail sales inched up +0.1% M/M, but missed the +0.3% estimate.
At the same time, the New York Fed’s monthly survey of manufacturers in the state came in. The headline general business conditions index shot up to its highest level in nearly three years.
Among active movers, Applied Materials (AMAT) sank 8.5% as analysts expressed concerns about the semiconductor equipment maker’s guidance.
U.S.-listed shares of Alibaba (BABA) -2.5% even as the Chinese e-commerce major showed strong quarterly growth in its cloud business.