Wall Street Weighs ‘Hawkish Cut’ While Tech Shines: Markets Wrap

This content was published on December 13, 2024 - 22:30

6 minutes

(Bloomberg) — This year’s frontrunners, big technology stocks, set a record while Treasuries sank as investors braced for a slowdown in the pace of the Federal Reserve’s interest-rate cuts ahead of a meeting next week.

The Nasdaq 100 climbed for the fourth week in a row powered by a Friday surge in Broadcom Inc. across the entire chip-technology complex. The tech-heavy gauge rose 0.8% to an all-time high for the second time in three days while other major US stock indexes struggled. The S&P 500 slid 0.6% this week while the blue-chip Dow Jones Industrial Average dropped 1.8%.

Shares in Broadcom Inc. jumped 24% to a record after predicting a boom in demand for its artificial intelligence chips and reaching a $1 trillion market value. Peers Marvell Technology Inc., Micron Technology Inc. and Nvidia Corp. also rose.

A widely expected quarter-point interest-rate cut from the Federal Reserve on Wednesday, could juice up this year’s seemingly unstoppable climb. The S&P 500 — fueled mostly by tech names — has rallied 27% so far in 2024, and strategists polled by Bloomberg predict it will outpace European peers again in 2025.

While Wall Street has applauded the rally, that the rest of the equity market has largely lagged tech behemoths has been a growing concern for some.

“Tech stocks have reminded investors over the past week that the AI/quantum computing movement isn’t dying down anytime soon,” said Tom Essaye, founder of The Sevens Report. Still, “strength in tech masked what was an average performance for the rest of the market.”

A Bespoke Investment Group analysis noted that there hasn’t been a single session in December where more stocks in the S&P 500 gained than declined. By their calculations hat’s the longest streak in more than 20 years.

Around a third of stocks in the benchmark advanced Friday while the vast majority traded lower. An equal-weighted gauge of the S&P 500 slid.

Meanwhile, the world’s biggest bond market sank deeper, with Treasuries set for their worst week in more than two months. The yield on the 10-year benchmark rose to 4.40%.

“The market is readying for another move from the Fed that is more likely than not to be characterized as a hawkish cut,” BMO’s Ian Lyngen wrote to clients Thursday.

After a series of mixed data this week — including accelerating wholesale inflation and higher-than-expected jobless claims — swaps traders have pared back wagers on the Fed’s easing path. They are now pricing in around three quarter-point rate cuts over the next 12 months. A week ago they had seen better than 50/50 odds of a fourth cut and there may be more pullbacks to come.

The US central bank’s three-year outlook won’t fully incorporate “Trump shocks,” according to Evercore ISI’s Krishna Guha, “implying the median three could really be two on a fully marked-to-market basis.”

“The Fed is adopting a high optionality approach around a baseline that seeks to keep policy dynamically well-positioned as we move into the high-uncertainty Trump period,” the former New York Fed official said.

In currency markets, a Bloomberg gauge of dollar strength steadied against a basket of currencies, notching a second straight week of gains.

Timothy Graf, head of EMEA macro strategy at State Street Global Markets expects more gains for the greenback, noting the Fed’s easing cycle could prove shallow relative to Europe, where economic growth is weaker. Swap markets aren’t pricing a cut from the Bank of England at next week’s meeting, despite weak data Friday.

The pound weakened after Britain’s economy unexpectedly contracted for a second straight month in October. The euro strengthened after the European Central Bank sounded less dovish on rates than some expected following a policy announcement Thursday, forcing traders to pare policy-easing bets for next year.

China Letdown

Asian shares fell as a key economic meeting in China pledged to boost consumption but failed to offer details on fiscal stimulus. A gauge of world stocks marked its worst week in nearly a month.

“The newsflow has been underwhelming,” Beata Manthey, head of European equity strategy at Citigroup Inc., said of announcements from China. “The markets want numbers. We didn’t get the numbers.”

However, Chinese 10-year government bond yields slid below 1.8% for the first time in history, as authorities vowed to cut policy rates and banks’ reserve ratios. Investors also poured $5.6 billion into Chinese stock funds over the past week, Bank of America Corp. strategists said, attributing the inflows to the policy-easing pledges.

WTI crude futures climbed past $71 a barrel for the first time in December, up nearly 6% this week on the prospect for tighter US sanctions against Iran and Russia.

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