(Bloomberg) — Stock markets fell amid uncertainty over how aggressively the Federal Reserve will cut interest rates 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 an all-time closing high earlier this week. Treasury yields rose across the curve. Traders are fully pricing in a 25 basis point rate cut by the Federal Reserve on Wednesday, with the chance of a bigger move seen as a coin flip.
The new quarterly forecasts, to be released at the conclusion of the central bank’s two-day policy meeting, will offer further insight into the future path of borrowing costs and the economy. The decision will be announced in a post-meeting statement at 2 p.m. in Washington. Jerome Powell is scheduled to hold a news conference 30 minutes later.
The Nasdaq 100, Dow Jones Industrial Average and Russell 2000 were little changed. The yield on 10-year U.S. Treasury notes rose 3 basis points to 3.68%. The dollar was steady at current levels.
Wall Street and the Federal Reserve:
Ultimately, whether the Fed cuts rates by 25 or 50 basis points today is less important than the guidance provided on future cuts, as the market wants to see the framework laid out for a fairly aggressive rate-cutting path in the coming months to support hopes of a soft landing.
Therefore, expectations and Powell’s speech will be crucial in determining the market’s reaction late in the session.
As financial conditions ease in anticipation of the Fed’s rate-cutting cycle and economic growth begins to recover, we feel that small-cap and equal-weighted indices are expected to outperform their larger, capital-weighted peers as the year ends.
Today’s Fed decision could lead to a significant repricing of interest rates depending on the size of the rate cut and the connections.
Any potential endpoint for the Fed — or final interest rate — may reflect adjusted market ideas 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 will flatten mechanically — but the 10-year Treasury is unlikely to move much. By contrast, if the Fed cuts rates by 50 basis points and moves the bottom rate lower, there is significant upside potential. Our view: The Fed is unlikely to deliver a hawkish rate cut that would support the duration of the downturn and the steepness of the curve.
Market noise is likely to peak in the days following the Fed decision.
But the most important event has already happened – the Fed has signaled that the interest-rate-cutting cycle has begun and that a series of cuts are on the way. With household and corporate balance sheets still strong, it will not take much Fed easing to avoid a recession. In fact, the US economy and risk assets are already in a stronger position going into 2025.
There is a high potential for market turmoil today.
If Powell cuts rates by 25 basis points, he is telling us that a 50 basis point cut is possible in the next meeting. If he cuts by 50 basis points, he is telling us not to get used to this pace. Either way, this is all just market noise as we have already priced in several cuts over the next year.
Uncertainty remains high regarding the size of the rate cut. Last week’s stronger-than-expected U.S. core CPI and PPI inflation data led to speculation of a shift toward quantitative easing. However, the interest rate market has since moved toward pricing in a 50 basis point cut.
If the Fed opts for a smaller 25 basis point cut, it would surprise the market now, and would likely cause a short-term rally in the dollar — though this could be short-lived if Powell adopts a more dovish tone during his press conference.
It’s been a long time since it became known what the Fed plans to do at a meeting, and this time, the last-minute uncertainty on the subject could raise more doubts than usual.
We think they will go up 25 basis points and then signal their willingness to be more aggressive if needed.
But we certainly recognize that it could go either way. Of course, if they decide to cut rates by “just” 25 basis points, that will lead to discussions about whether they are ignoring this game. If they decide to cut rates by 50 basis points, that will at least raise some questions about whether the Fed is becoming more concerned about a hard landing.
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Main events this week:
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UK interest rate decision, Thursday
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US Board of Governors Index, Initial Jobless Claims, Existing Home Sales, Thursday
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FedEx Earnings Thursday
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Japan Interest Rate Decision, Friday
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Eurozone Consumer Confidence, Friday
Some key movements in the markets:
Stocks
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The S&P 500 was little changed as of 1:38 p.m. ET in New York.
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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 saw little change.
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The Russell 2000 Index was little changed.
Currencies
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The Bloomberg Dollar Index was little changed.
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The euro rose 0.1% to $1.1126.
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The pound rose 0.4% to $1.3210.
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The Japanese yen rose 0.4% to 141.87 yen per dollar.
Cryptocurrencies
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Bitcoin fell 0.5% to $59,844.65
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Ether fell 1.8% to $2,302.86.
Bonds
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The yield on the 10-year US Treasury note rose three basis points to 3.68%.
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The yield on German 10-year bonds rose five basis points to 2.19%.
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The yield on 10-year British bonds rose eight basis points to 3.85%.
Goods
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West Texas Intermediate crude fell 0.9% to $70.56 a barrel.
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Spot gold rose 0.1 percent to $2,572.59 an ounce.
This story was produced with the help of Bloomberg Automation.
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