Stocks Fail to Recover From Fed-Fueled Selloff: Markets Wrap

(Bloomberg) -- US stocks ended a choppy session with modest losses, struggling to rebound from the selloff they suffered after the Federal Reserve dialed back rate-cut expectations for next year. 

The S&P 500 gave up earlier gains to end the day little changed. The Nasdaq 100 dropped 0.5% after oscillating between small advances and declines for most of the session. 

The US 10-year Treasury yield rose to 4.57%, a level last seen in May. A Bloomberg dollar index continued to hover around 2022 highs. The yen remained lower after the Bank of Japan left borrowing costs unchanged earlier. Mexico’s peso shrugged off losses after the country’s central bank delivered a fourth consecutive rate cut. 

The US economy remains resilient, as data on Thursday continued to prove. Notably, one of the Fed’s preferred gauges of inflation was revised up to 2.2%. Given that Chair Jerome Powell said future easing would require fresh progress on inflation, markets will now be closely watching the last noteworthy piece of data for the year — personal consumption expenditures for November — due Friday.

For now, investors are being defensive, said Matt Maley, chief market strategist at Miller Tabak + Co.

“They’re not jumping back into the market with both feet,” he said. “So, if we don’t get some relief from the bond market soon, there might not be a Santa Claus rally this year.”

Markets were jolted after the Fed scaled back the number of cuts it anticipates in 2025 to two. The so-called hawkish pivot was likely what the central bank had planned for next year before the meeting, according to Evercore ISI’s Krishna Guha. Powell said on Wednesday that some policymakers had begun to weave into their forecasts the potential impact of higher tariffs that President-elect Donald Trump may implement.

“To a large degree the Fed decided to pad its forecast and pre-position for Trump – pulling forward much of what would otherwise have been a hawkish update in March,” Guha wrote in a note. 

That makes the Fed’s pronouncement of a new phase of policy “hawkish absolutely, but not as hawkish as it looked,” Guha wrote. He’s expecting the US central bank to skip a rate cut in January unless cracks appear in the labor market.

The swaps market is now implying fewer than two quarter-point reductions for the entirety of 2025, even less than what was implied in the Fed’s so-called dot plot on Wednesday.

Traders also parsed gross domestic product numbers on Thursday. The data showed that the US economy expanded at a faster clip in the third quarter than previously expected. Consumer spending was also marked up. Applications for US unemployment benefits fell last week amid volatility seen during the holiday season. Existing-home sales in the US topped a rate of 4 million in November for the first time in six months.

US Corporate Highlights

Beyond the US

Earlier, the Bank of England kept borrowing costs unchanged at 4.75%. Still, money markets now see two quarter-point reductions and a strong chance of a third in 2025 after three of the nine-member policy committee called for a cut at Thursday’s meeting. Swap traders had priced in less than two reductions next year prior to the announcement. 

The pound declined.

The yen weakened after comments by BOJ Governor Kazuo Ueda cast doubt on whether the bank could hike interest rates in January. 

In China, authorities ramped up support for the currency via its daily reference rate after the Fed’s caution over future rate cuts sent the offshore yuan to a fresh one-year low.

In commodities, oil fell by almost 1% after the Fed’s outlook for next year boosted the dollar. 

Key events this week: 

Some of the main moves in markets:

Stocks

Currencies

Cryptocurrencies

Bonds

Commodities

This story was produced with the assistance of Bloomberg Automation.

--With assistance from Cecile Gutscher, Cristin Flanagan and Andre Janse van Vuuren.

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