Stocks Drop Before Fed’s Last Decision of the Year: Markets Wrap

(Bloomberg) — US stocks declined as traders braced for the Federal Reserve’s widely anticipated rate decision and its forecast for next year.

The S&P 500 and the Nasdaq 100 slid 0.4%. The Dow Jones Industrial Average posted its longest losing streak since 1978. The yield on 10-year Treasuries was little changed at 4.40%. Bloomberg’s dollar gauge fluctuated for most of the session.

Earlier, data showed that US retail sales increased at a firm pace in November, highlighting consumer resilience. While the report didn’t seem to change expectations for a rate cut by the Fed this week, there is an understanding that the central bank will prepare the market for a pause early next year, said Ian Lyngen of BMO Capital Markets. Industrial production data also came in Tuesday, unexpectedly declining for a third month in November. 

Traders are now turning to the Fed’s last rate decision of the year due Wednesday. A quarter-point cut is widely expected, but what happens in the following months is less clear. While the US economy is resilient, the prospect of inflationary import tariffs proposed by the incoming administration of Donald Trump may give Fed officials pause about the pace of further moves.

Bank of America Corp. sees the Fed lowering interest rates to the 3.75% level — or three more cuts from where they are, CEO Brian Moynihan said on Bloomberg Television.

“They need to bring it down a little bit, they just have to be more careful because the economy is stronger than we thought three months ago, six months ago but still has potential weaknesses” he said. “We haven’t even talked about what is going on outside the United States that could affect it — not tariffs but wars.”

On the other hand, Chris Larkin, managing director, trading and investing, E*Trade from Morgan Stanley, says more strong economic data like retail sales could bolster the case for the Fed to pause in January.

In either case, what happens to stocks and bonds will be determined by what the Fed says about cuts in 2025 instead of the central bank’s decision tomorrow, wrote Tom Essaye, president and founder of Sevens Report and a former Merrill Lynch trader. 

Currencies and Central-Bank Bets

In Canada, inflation dropped below the central bank’s target for the second time in three months. The data is expected to give Bank of Canada officials confidence that their rapid rate cuts didn’t derail their efforts to keep price gains at the 2% target. However, persisting political discord in Canada pushed the loonie to a Covid-era low. 

Concerns over Brazil’s ballooning debt and deficits pushed the real to all-time lows. To stem the slide in the currency, its central bank sold over $3 billion in local markets in back-to-back auctions — its fourth intervention in three days.

In Chile, its central bank cut rates by a quarter point for the third meeting.

Elsewhere, money markets continued to trim wagers on Bank of England interest-rate cuts as attention turns to Wednesday’s UK November inflation figures. Traders place the chance of a third quarter-point reduction next year at 25%, down from 90% on Monday. Gilt yields rose.

Earlier, index of Asian currencies fell to the lowest in more than two years amid pessimism over China’s economic outlook and expectations that Trump policies will drive gains in the greenback. 

Among other notable currencies, the yen snapped a six-day losing streak. The yen’s rapid decline in the past week had strategists warning that further weakness may trigger verbal intervention from authorities and add pressure on the Bank of Japan to hike rates. 

Meanwhile, oil fell for a second day after Chinese economic data stoked concerns about demand and equity markets slipped. 

Key events this week: 

• UK CPI, Wednesday
• Eurozone CPI, Wednesday
• US rate decision, Wednesday
• Japan rate decision, Thursday
• UK BOE rate decision
• US revised GDP, Thursday
• Japan CPI, Friday
• China loan prime rates, Friday
• Eurozone consumer confidence, Friday
• US personal income, spending & PCE inflation, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.4% as of 4:02 p.m. New York time
• The Nasdaq 100 fell 0.4%
• The Dow Jones Industrial Average fell 0.6%
• The MSCI World Index fell 0.4%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro fell 0.2% to $1.0488
• The British pound rose 0.2% to $1.2709
• The Japanese yen rose 0.4% to 153.55 per dollar

Cryptocurrencies

• Bitcoin rose 0.5% to $106,608.76
• Ether fell 2.9% to $3,929.27

Bonds

• The yield on 10-year Treasuries was little changed at 4.40%
• Germany’s 10-year yield declined two basis points to 2.23%
• Britain’s 10-year yield advanced eight basis points to 4.52%

Commodities

• West Texas Intermediate crude fell 0.7% to $70.19 a barrel
• Spot gold fell 0.3% to $2,643.85 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Vildana Hajric and Andre Janse van Vuuren.

©2024 Bloomberg L.P.