(Bloomberg) — Stocks wobbled amid uncertainty about how aggressive the Federal Reserve will be with interest rate cuts after keeping them at a two-decade high for more than a year.
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The S&P 500 was little changed after briefly surpassing its all-time high earlier this week. Government bond yields rose across the entire curve. Traders are fully pricing in a 25 basis point Fed cut on Wednesday, with the chance of a bigger move seen as a tailspin.
New quarterly projections released at the end of the central bank’s two-day policy meeting will provide further insight into the future trajectory for borrowing costs and the economy. The decision will be announced in a statement after the meeting at 2 p.m. in Washington. Jerome Powell will hold a press conference 30 minutes later.
The Nasdaq 100 and the Dow Jones Industrial Average were little changed. The Russell 2000 fell 0.1%. The yield on ten-year government bonds rose by four basis points to 3.68%. The dollar was flat.
Wall Street on the Fed:
In short, whether the Fed delivers a 25 bp or 50 bp rate cut today is less important than the guidance for future cuts as the market wants to see the framework set for a fairly aggressive rate cut path in the coming months to support rates . hoping for a soft landing.
So Powell’s projections and speech will be critical to market reaction late in the session.
As financial conditions ease in anticipation of the Fed’s austerity cycle and economic growth begins to pick up, we sense that small companies and equal-weighted indices will outperform their larger capitalization-weighted peers by the end of the year.
The Fed’s decision today to suspend interest rates could lead to a significant rate reset, depending on the size of the rate cut and communications.
A possible new Fed trough – or terminal rate – could reflect revised market thinking about where the Fed will stop versus neutral, which is a function of downside growth risks.
If the Fed cuts rates by 25 basis points – but leaves the bottom unchanged – the curve would mechanically flatten – but the 10-year Treasury is not expected to move much. On the other hand, if the Fed lowers 50 and shifts the terminal rate lower, there is meaningful bull steepening potential. Our view: The Fed is unlikely to make an aggressive rate cut, which should be supportive for the duration and the steepening curve.
The market noise is likely to peak in the days following the Fed’s decision.
However, the most important event has already occurred: the Fed has signaled that the rate cutting cycle is beginning and that a series of cuts are on the way. With household and corporate balance sheets still solid, it won’t take much Fed easing to avoid a recession. The U.S. economy and risk assets are already in stronger stead in 2025.
There is great potential for market whiplash today.
If Powell lowers the 25 basis points, he will tell us in the coming meetings that 50 basis points is possible. If he reduces the speed by 50 fps, he will tell us not to get used to that cadence. Be that as it may, this is all market noise as we have already priced in so many cuts for next year.
The uncertainty about the size of the interest rate cut remains high. Last week’s stronger-than-expected US core CPI and PPI inflation data led to speculation of a mild shift. However, since then the interest rate market has moved towards a 50 basis point price reduction.
If the Fed opts for a smaller cut of 25 basis points, it will surprise the market now, likely causing a brief rally in the dollar – although this could be short-lived if Powell takes a dovish tone during his press conference.
It has been a very long time since it was not well known what the Fed would do at a given meeting. This time, the last-minute uncertainty on the subject could cause more fireworks than usual.
We think they will go to 25 basis points and then signal that they are willing to be more aggressive if necessary.
However, we certainly recognize that it could go either way. If they get “only” 25 bps, that will obviously lead to discussions about whether they support the piece. And if they go to 50 basis points, that will at least raise some questions about whether the Fed has become much more concerned about a hard landing.
Business highlights:
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An American safety panel has ordered Nippon Steel Corp. cleared its plans to acquire United States Steel Corp. for $14.1 billion, likely leading to a decision on the politically controversial takeover after the U.S. election in November, according to people familiar with the matter. .
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Google won a lawsuit with the European Union over a €1.5 billion ($1.7 billion) fine for stifling competition in online advertising, capping last week’s crushing defeat in a separate verdict alleging abuse of his monopolistic power was partially redeemed.
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Qualcomm Inc. lost a court case in the European Union over a multi-million euro fine over allegations that the US company priced some chips low enough to squeeze out a smaller rival.
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Elliott Investment Management still wants Bob Jordan, CEO of Southwest Airlines Co. replaced, a union official said, suggesting the changes the airline has already promised are not enough to satisfy the activist shareholder.
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23andMe Holding Co. co-founder and Chief Executive Officer Anne Wojcicki told employees she remains committed to taking the genetic testing company private following the resignation of its independent board members.
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The shares of Intuitive Machines Inc. rising after the space company said it had won another NASA contract. This could be worth as much as $4.8 billion.
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Rogers Communications Inc. buys the 37.5% stake of BCE Inc. in Maple Leaf Sports & Entertainment Ltd. for C$4.7 billion ($3.5 billion), giving the telecommunications giant a majority stake in the sports company whose most valuable assets are the NHL’s Toronto. Maple Leafs and Toronto Raptors from the NBA.
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Tupperware Brands Corp., whose plastic containers became synonymous with food storage, filed for bankruptcy after a years-long struggle with sales declines and growing competition.
Main events this week:
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British interest rate decision, Thursday
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American Conf. Board leading index, initial unemployment claims, existing home sales in the US, Thursday
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FedEx earnings, Thursday
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Japan interest rate decision, Friday
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Consumer confidence in the eurozone, Friday
Some of the major moves in the markets:
Stocks
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The S&P 500 was little changed at 12:40 a.m. New York time
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The Nasdaq 100 was little changed
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The Dow Jones Industrial Average was little changed
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The MSCI World Index was little changed
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The S&P 500 Equal Weighted Index was little changed
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The Bloomberg Magnificent 7 Total Return Index was little changed
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The Russell 2000 index fell 0.1%
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro was little changed at $1.1123
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The British pound rose 0.3% to $1.3207
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The Japanese yen rose 0.4% to 141.87 per dollar
Cryptocurrencies
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Bitcoin fell 0.4% to $59,891.52
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Ether fell 1.6% to $2,306.12
Bonds
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The yield on ten-year government bonds rose by four basis points to 3.68%
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The German ten-year yield rose by five basis points to 2.19%
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The British ten-year yield rose by eight basis points to 3.85%
Raw materials
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West Texas Intermediate crude fell 1.1% to $70.44 a barrel
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Spot gold rose 0.1% to $2,572.18 an ounce
This story was produced with the help of Bloomberg Automation.
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