US Stocks Drop Before Fed’s Last Decision Of The Year: Market Wrap

U.S. stocks fell as investors prepared for the Federal Reserve's final interest rate decision of the year, scheduled for release on Wednesday.

Market Reactions Ahead of Fed Announcement

The S&P 500 and the Nasdaq 100 both decreased by 0.4%, while the Dow Jones Industrial Average experienced its longest losing streak since 1978. Meanwhile, the yield on 10-year Treasury notes remained stable at 4.40%. Additionally, Bloomberg's dollar index had fluctuations throughout the trading session.

Recent data indicated a solid increase in U.S. retail sales for November, showcasing consumer robustness. However, this report did not significantly alter expectations regarding a potential interest rate cut by the Fed. According to Ian Lyngen of BMO Capital Markets, there is an understanding that the central bank might set the stage for maintaining rates in early 2025. Furthermore, industrial production unexpectedly dropped for the third consecutive month, raising questions about economic momentum.

As traders await the Fed's decision, a quarter-point rate reduction is broadly anticipated. Yet, ambiguity surrounds future rate movements. While the U.S. economy demonstrates resilience, concerns regarding potential inflationary tariffs from the incoming administration lead to uncertainty about the Fed’s next steps.

Bank of America’s CEO, Brian Moynihan, expressed expectations for the Fed to lower rates to 3.75%, indicating the need for caution due to the economy's strength and various global risks. He mentioned that geopolitical issues, aside from trade tariffs, could also impact economic outlooks.

On the flip side, Chris Larkin from E*Trade noted that further robust economic indicators could strengthen the argument for the Fed to hold rates steady in January. In any scenario, the future dynamics affecting stocks and bonds will hinge on the Fed's projections for 2025, rather than solely on the decision made tomorrow, according to Tom Essaye, president of Sevens Report.

Global Economic Insights

In Canada, inflation dropped below the central bank's target for the second time in three months, likely reassuring Bank of Canada officials regarding their recent rate cuts. However, ongoing political strife in Canada has resulted in the loonie hitting a low not seen since the Covid pandemic.

Brazil is facing challenges as its increasing national debt and deficits have caused its currency, the real, to tumble to record lows. In response, the Brazilian central bank has intervened in local markets, conducting multiple auctions to stabilize the currency.

In Chile, the central bank has reduced rates for the third consecutive meeting by a quarter point.

Elsewhere, money markets adjusted their forecasts on potential interest rate cuts from the Bank of England, especially with key inflation data scheduled for release on Wednesday. Expectations for a third quarter-point cut next year have dropped significantly.

In Asia, the index for Asian currencies has fallen to its lowest point in over two years due to pessimism surrounding China's economic prospects. Additionally, the Japanese yen managed to halt a six-day decline amidst concerns that continued depreciation might provoke an intervention by authorities and necessitate a rate hike by the Bank of Japan.

On the commodities front, oil prices experienced a decline for the second consecutive day, influenced by bearish Chinese economic data and overall market pullbacks.

Key Market Events This Week

• UK CPI, Wednesday

• Eurozone CPI, Wednesday

• U.S. rate decision, Wednesday

• Japan rate decision, Thursday

• UK BOE rate decision

• U.S. revised GDP, Thursday

• Japan CPI, Friday

• China loan prime rates, Friday

• Eurozone consumer confidence, Friday

• U.S. personal income, spending & PCE inflation, Friday

Market Overview

The latest market movements included:

Stocks

• The S&P 500 fell 0.4% by market close.

• The Nasdaq 100 also declined by 0.4%.

• The Dow Jones Industrial Average dropped by 0.6%.

• The MSCI World Index decreased 0.4%.

Currencies

• The Bloomberg Dollar Spot Index showed minimal changes.

• The euro fell 0.2% to $1.0488.

• The British pound increased 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 slid 2.9% to $3,929.27.

Bonds

• The yield on 10-year Treasuries remained steady at 4.40%.

• Germany’s 10-year yield dropped by two basis points to 2.23%.

• Britain’s 10-year yield increased by eight basis points to 4.52%.

Commodities

• West Texas Intermediate crude oil fell 0.7% to $70.19 a barrel.

• Spot gold declined 0.3% to $2,643.85 an ounce.

Stocks, Market, Economy, Bonds, Inflation, Currency