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Stocks Fall as Powell Signals Patience on Rate Cuts

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07/31/2019 | 04:49pm EST

By Gunjan Banerji and Lauren Almeida

Major U.S. stock indexes slid after the Federal Reserve signaled caution on future interest-rate cuts shortly after the central bank eased rates for the first time in a decade.

Some investors are betting on more than one rate cut this year, and while the Fed's policy statement left open the door for the Fed to reduce rates again, Federal Reserve Chairman Jerome Powell suggested Wednesday that this cut wasn't the beginning of a long easing cycle. He also reiterated that the central bank would continue monitoring incoming economic data.

"They always say the market's a greedy beast and no matter what it gets, it wants more," said JJ Kinahan, chief market strategist at TD Ameritrade.

The S&P 500 ended the day down 32.80 points, or 1.1%, to 2980.38. The Nasdaq Composite dropped 98.19 points, or 1.2%, to 8175.42. The Dow Jones Industrial Average closed down 333.75 points, or 1.2%, to 26864.27 after falling more than 400 points in afternoon trading.

The S&P 500's drop Wednesday snapped a 36-session streak in which it didn't move up or down more than 1%.

U.S. stocks had been little changed ahead of the Fed decision and swung as Mr. Powell spoke during his press conference, with investors parsing his words and recalibrating their outlooks on potential rate cuts ahead.

Mr. Kinahan said it was notable that the policy statement showed that two Fed officials voted against lowering the short-term benchmark rate, rather than a unanimous decision.

Major stock indexes have rallied this year, fueled by the prospect of the first rate cut, with some investors betting on a half-percentage-point cut ahead of the meeting. On Wednesday, the Fed delivered a quarter-point cut, which was widely expected.

The meeting's end marks a pivotal moment for stocks, bonds and currency markets, with the Fed moving to trim rates even as they remain historically low. This cut marks just the fifth time in the past 25 years that the Fed moved to trimming rates from increasing them.

Treasurys and the U.S. dollar notched gains Wednesday as U.S. stocks slipped. The WSJ Dollar Index rose 0.4% to 91.27 in recent trading. The yield on the 10-year Treasury note fell to 2.034%, down from 2.063% on Tuesday.

The Fed's policy statement showed that the global economy cast a shadow over the central bank's outlook. Mr. Powell also cited trade tensions as having a significant effect on the economy. These dynamics led some investors to say they still expect more rate cuts.

"We're entering a period of slower economic growth," said Ben Kirby, a portfolio manager overseeing stocks at Thornburg Investment Management. "I'm still in the camp that we get one more [rate cut] this year."

Much was at stake ahead of the meeting. Investors sold stocks after the policy statement was released, and losses deepened after Mr. Powell said the central bank's cut was a "mid-cycle adjustment to policy" and that the Fed isn't beginning a long series of rate cuts.

Still, the idea that a rate cut was needed confounded some investors, who pointed to major U.S. stock indexes near records and unemployment near a half-century low. Many companies that have reported earnings have beat analysts' expectations, helping propel stocks to fresh highs last week.

"Why exactly are we cutting rates?" said Eddie Perkin, chief equity investment officer at Eaton Vance Management. "It doesn't really make sense to me." Mr. Perkin said unresolved trade tensions appear to be a bigger headwind for financial markets than the level of interest rates at the moment.

Earnings continued to drive individual stock moves. Apple stock jumped $4.26, or 2% to $213.04 after the company reported strong revenue growth on Tuesday. Advanced Micro Devices Inc. fell $3.42, or 10.1%, to $30.45 after it projected weaker-than-expected revenue growth for its current quarter.

Elsewhere, the Stoxx Europe 600 climbed about 0.2%. European bank stocks rose on Wednesday amid a set of strong earnings reports. Credit Suisse climbed 2.4% and BNP Paribas gained 1.6%. Deutsche Bank's stock rose 2.1%.

Earlier, Asian stocks fell after tweets from President Trump on Tuesday dampened optimism for a breakthrough in U.S.-China trade talks.

"There are issues that make a comprehensive and durable deal quite difficult to achieve," said Arnab Das, global market strategist at Invesco, adding that he doesn't expect a complete breakdown or a Brexit-type risk of a no-deal.

Hong Kong's Hang Seng was down by 1.3% and the Shanghai Composite Index fell by 0.7%.

Shares of Chinese property developers fell after the country's leadership vowed not to use the real-estate market as a tool to try to arrest an economic slowdown. At a meeting Tuesday, the Communist Party's top decision-making body reiterated that housing is "used for living, not for speculation," adding it "will not use real estate as a short-term means of stimulating the economy."

Global oil benchmark Brent crude was up 0.7% at $65.17 a barrel, amid continued tensions in the Middle East and expectations of lower interest rates in the U.S.

Shen Hong contributed to this article.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com and Lauren Almeida at lauren.almeida@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
CHINA-SHANGHAI COMP -0.64% 2891.34 End-of-day quote.15.75%
DJ INDUSTRIAL 0.07% 28009.87 Delayed Quote.20.05%
HANG SENG 1.22% 26644.6 Real-time Quote.1.84%
NASDAQ 100 0.04% 8315.775595 Delayed Quote.30.46%
NASDAQ COMP. -0.02% 8538.037329 Delayed Quote.27.79%
S&P 500 0.03% 3120.66 Delayed Quote.24.48%
US DOLLAR INDEX -0.16% 98 End-of-day quote.1.36%
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