This week has been significant for central banks, with key announcements from both the Federal Reserve and the Bank of England (BoE). Overnight, the BoE decided to maintain its interest rates at 4.75%, a move that was anticipated by the market. However, the decision was not without contention, as the Monetary Policy Committee's vote was split 6-3, reflecting differing views among its members. The BoE noted that while there has been some progress in reducing inflation, domestic inflationary pressures are easing slowly. The bank emphasized the need for a gradual approach to monetary policy to ensure inflation returns to the 2% target sustainably.
Yesterday, the Federal Reserve's rate cut also influenced market sentiment. The Fed reduced rates by 25 basis points, bringing the federal funds rate to a range of 4.25% to 4.50%. The decision was not unanimous, with Cleveland Fed President Beth Hammack voting to maintain the previous rate range. The Fed's projections suggest a slower pace of rate cuts in 2025, with only two quarter-point reductions expected next year. This cautious approach was described by Bank of America as a "hawkish cut," indicating the potential end of the rate-cutting cycle. Indeed, the Fed suggested that future rate cuts might not happen as swiftly as previously thought.
Wall Street took a nosedive yesterday, with the Dow Jones dropping 2.6%, the S&P 500 sliding 2.95%, the Nasdaq 100 tumbling 3.6%, and the Russell 2000 plummeting 4.4%. For those keeping score, that's not just a list of declines but also a hierarchy of risk. The Dow Jones, home to the titans of industry, is theoretically more robust than the scrappier Russell 2000, which hosts smaller, more volatile stocks. The culprit behind this market swoon? Federal Reserve Chair Jerome Powell, who struck a more cautious tone on inflation than investors had hoped. The market was bracing for this "hawkish cut", but investors, however, were crossing their fingers for a "neutral rate cut," a gentler approach without the stern lecture. Powell made it clear that further rate cuts hinge on progress toward the Fed's 2% inflation target, a level deemed healthy for the economy. Meanwhile, the Fed released a new dot plot, revealing members' expectations for future rates. Contrary to my previous report (note to self: time for a vacation), this forward-looking document shows key rates hovering around 3.9% by December 2025. This suggests only two rate cuts next year, a far cry from earlier investor hopes that rates might dip below 3% at some point in 2024.
The market is grappling with a familiar foe: heightened inflation uncertainty, which has thrown the anticipated path of rate cuts into disarray. Investors are sensing a wobble in the Fed's confidence, exacerbated by the inflationary policies Donald Trump is poised to roll out as he begins his presidency. In plain terms, U.S. equity markets took a nosedive last night as investors faced a harsh reality check. The pressing question is whether this is merely a wake-up call or the onset of a correction to the year's exuberance—a financial hiccup before the holiday feast. It's worth noting the magnitude of this market movement. You'd have to rewind to 2001 to find such a negative reaction to a Fed announcement. Historically, Fed days tend to be favorable for equity markets. Similarly, U.S. 10-year Treasury yields haven't spiked this dramatically on a Fed day in over a decade. Unsurprisingly, the dollar strengthened against other currencies, adding complexity to the monetary strategies of the People's Bank of China and the Bank of Japan. The latter, as anticipated, maintained its rate status quo overnight, buying time to address the yen's depreciation against the dollar.
In the world of politics, where drama is never in short supply, Donald Trump has once again taken center stage. The former president has thrown a fit over the bipartisan federal funding bill, vowing to oust any Republican who dares to support it. This bill aims to extend government funding until March, thus averting a potential shutdown that could begin as soon as next Friday evening. As the year-end approaches, this political squabble introduces an unexpected risk to financial markets.
Turning our gaze to the Asia-Pacific region, markets are feeling the pressure, with China being the notable exception. South Korea and Australia have taken a significant hit, while Japan and India have managed to keep their losses within the 0.5-1% range. Meanwhile, Hong Kong has dipped by 0.5%, and mainland China has seen a slight uptick. Across the pond, European markets are decidedly bearish, with the Stoxx Europe 600 down 1.2%. However, futures on Wall Street point to a rebound, with the main three NYSE indices up by about 0.7%.
Today's economic highlights:
In the United States, the Bank of England's rate decision will precede the latest Q3 GDP reading, jobless claims and the Philly Fed index, followed by housing data. See the full calendar here.
- Dollar: EUR 0.9607 GBP 0.7927
- Ounce of gold: USD 2603
- Brent crude: USD 73.34 WTI: USD 70.03
- 10-year US bond: 4.53
- Bitcoin: USD 101,650
In corporate news:
- Lennox to replace Catalent in the S&P500.
- Micron plunges 16% after its quarterly results.
- Lennar plunges 8% after quarterly results.
- GFL Environmental is in exclusive talks with Apollo Global Management to sell its environmental services division for around C$8 billion (US$5.59 billion), The Globe and Mail reported on
- Wednesday.
- Apple is reportedly in talks with Tencent and ByteDance to deploy AI capabilities in China.
- FDA classifies Boston Scientific catheter recall as “most serious”.
- Chevron to pay Woodside $400 million in energy project equity swap.
Top earnings reports: Accenture, Nike, Cintas, Fedex, Paychex...
Analyst recommendations:
- Ally Financial Inc.: Morgan Stanley maintains its overweight rating with a price target raised from USD 41 to USD 42.
- American Express Company: Morgan Stanley maintains its equalwt rating with a target price raised from USD 252 to USD 305.
- Broadcom Inc.: Baptista Research upgrades to outperform from buy with a price target raised from USD 193.10 to USD 289.
- Costco Wholesale Corporation: Baptista Research downgrades to underperform from hold with a target price raised from USD 940.50 to USD 945.50.
- Dt Midstream, Inc.: Stifel upgrades to buy from hold with a price target raised from USD 89 to USD 106.
- Elastic N.v.: Wedbush downgrades to neutral from outperform with a target price of USD 135.
- Fortinet, Inc.: KeyBanc Capital Markets upgrades to overweight from sector weight with a target price of USD 115.
- General Dynamics Corporation: RBC Capital downgrades to sector perform from outperform with a target price reduced from USD 330 to USD 290.
- Graco Inc.: BNP Paribas Exane upgrades to outperform from neutral with a price target raised from USD 80 to USD 105.
- Hewlett Packard Enterprise Company: Deutsche Bank upgrades to buy from hold with a target price of USD 25.
- Hexcel Corporation: RBC Capital upgrades to outperform from sector perform with a target price raised from USD 68 to USD 74.
- Lockheed Martin Corporation: Morgan Stanley maintains its market weight rating with a target price reduced from USD 599 to USD 555.
- Okta, Inc.: KeyBanc Capital Markets upgrades to overweight from sector weight with a target price of USD 115.
- Rtx Corporation: RBC Capital upgrades to outperform from sector perform with a target price raised from USD 130 to USD 140.
- Sentinelone, Inc.: Jefferies upgrades to buy from hold with a target price raised from USD 27 to USD 30.
- Snowflake Inc.: Wedbush downgrades to neutral from outperform with a target price of USD 190.
- Sofi Technologies, Inc.: Morgan Stanley maintains underweight rating with a price target raised from USD 7.50 to USD 13.
- Stanley Black & Decker, Inc.: Mizuho Securities upgrades to outperform from neutral with a target price of USD 110.
- Tapestry, Inc.: Jefferies upgrades to buy from hold with a price target raised from USD 50 to USD 80.
- Trimble, Inc.: Baptista Research upgrades to outperform from buy with a price target raised from USD 70.30 to USD 85.30.
- Uwm Holdings Corporation: Morgan Stanley downgrades to equalwt from equalwt with a price target reduced from USD 7.50 to USD 6.50.
- Zoom Communications Inc.: Jefferies upgrades to buy from hold with a price target raised from USD 85 to USD 100.
- Alphawave Ip Group Plc: Barclays maintains its overweight recommendation and reduces the target price from 1.90 to GBP 1.50.