The Federal Open Market Committee (FOMC) did pretty much what the market had expected it to do: cut the target range for the fed funds rate by 25 basis points to 4.25-4.50%, imply another rate cut at the January FOMC meeting was unlikely, and showcase a median estimate for the 2025 fed funds rate that was higher than the September estimate.
Notwithstanding these expectations, the wheels fell off the market in the wake of the FOMC decision, Summary of Economic Projections, and Fed Chair Powell’s press conference, all of which made it clear that the Fed might (emphasis our own) cut rates two more times in 2025.
In brief, the stark reality hit that the policy rate won’t be coming down as much as previously hoped (key word) and that interest rates are apt to remain higher for longer as policy makers contemplate a future that could involve sticky inflation due to ongoing growth, the wealth effect, possible trade wars, and the deportation of illegal immigrants.
What market participants are contemplating now, however, is a rebound effort, armed with an understanding that the Dow Jones Industrial Average is on its longest losing streak since 1974 and that the Russell 2000 saw its worst day since June 2020.
Currently, the S&P 500 futures are up 39 points and are trading 0.5% above fair value, the Nasdaq 100 futures are up 121 points and are trading 0.6% above fair value, and the Dow Jones Industrial Average futures are up 290 points and are trading 0.6% above fair value.
It is a textbook reaction to a large selloff, but like yesterday, how the market opens isn’t as important as how it finishes. Yesterday’s finish was ugly for both the stock and bond markets. Interestingly, the 10-yr note yield has not backed down from its post-FOMC spike. It settled yesterday at 4.49%, but it is up another six basis points today to 4.55%.
We mentioned yesterday that 4.50% seems to be the line in the sand that makes it difficult to look past stretched equity valuations, so the key to sustaining a reflexive rebound effort today may just be the behavior of the 10-yr note.
There has been a lot of news for market participants to take in this morning.
There is the potential for a government shutdown after President-elect Trump expressed his disapproval of the continuing resolution that had been worked out and added that Congress should pass a streamlined bill that also includes an agreement to increase the debt ceiling.
There were disappointing earnings results and/or guidance from Micron (MU), Lennar (LEN), and Lamb Weston (LW) counterbalanced with favorable reactions to the reports from Darden Restaurants (DRI), CarMax (KMX), and Accenture (ACN).
There have been additional central bank decisions, featuring a 6-to-3 vote by the Bank of England to leave its benchmark rate unchanged at 4.75%, an 8-to-1 vote by the Bank of Japan to keep its benchmark rate unchanged at 0.25%, a 25-basis points rate cut to 2.50% by Sweden’s Riksbank that was also deemed a hawkish cut, and Norway’s Norges Bank leaving its benchmark rate unchanged at 4.50%.
There has also been another stream of economic data that could be deemed mostly better than expected.
- Initial jobless claims for the week ending December 14 decreased 22,000 to 220,000 (Briefing.com consensus 237,000). Continuing jobless claims for the week ending December 7 decreased 5,000 to 1.874 million.
- The key takeaway from the report is the low level of initial jobless claims, which connotes a reluctance on the part of employers to layoff staff.
- The third estimate for Q3 GDP included an upward revision to 3.1% (Briefing.com consensus 2.8%) from the second estimate of 2.8%. The GDP Deflator was left unchanged at 1.9%, as expected.
- The key takeaway from the report is that it is dated (we’re less than two weeks away from the end of the fourth quarter); however, the report speaks to the enduring — and surprising — strength of the U.S. economy despite the Fed raising rates 12 times between March 2022 and July 2023.
- The December Philadelphia Fed Index checked in at -16.4 (Briefing.com consensus 3.0) following a -5.5 reading for November. The line between expansion and contraction for this series is 0.0.
- The key takeaway from the report is that manufacturing activity in the Philadelphia Fed region contracted in December at a faster pace than the prior month.
—
Originally Posted December 19, 2024 – Waiting to see if reflexive rebound effort holds
Disclosure: Interactive Brokers
Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from Briefing.com and is being posted with its permission. The views expressed in this material are solely those of the author and/or Briefing.com and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
