Dashed expectations of more Fed cuts hammered the markets

On By Littum

Traders work on the New York Stock Exchange on December 17, 2024.

SNEEZE

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What you need to know today

A cut now, but fewer ahead
The US Federal Reserve cut rates by 25 basis points on Wednesday, bringing its overnight borrowing rate to a target range of 4.25%-4.5%. In the Fed’s dot plot indicating expectations for interest rates in the coming years, the central bank mostly indicated just two rate cuts for 2025, fewer than the four cuts previously forecast in September.

The Bank of Japan holds the rates
The Bank of Japan kept its benchmark interest rate unchanged at 0.25 percent on Thursday. The yen then weakened to a one-month low against the dollar. Analysts had been divided over the BOJ’s move: A CNBC poll showed 54% of respondents thought the BOJ would hold, while a Reuters poll of economists expected the BOJ to raise interest rates.

Sharp sell-off in the markets
US markets sold off sharply from Wednesday. The Dow Jones Industrial Average lost more than 1,000 points, falling 2.58% for its 10th consecutive day of losses. The S&P 500 withdrew 2.95% and the Nasdaq Composite decreased by 3.56 per cent. On Thursday, Asia Pacific markets followed Wall Street’s decline. South Korea’s Kospi index fell as much as 1.8%, one of the steepest declines in the region.

Disappointing guidance from Micron
Shares of Microns plunged more than 15% in extended trade after the company provided weaker-than-expected guidance, although it beat expectations for earnings for its latest quarter. For the current quarter, Micron expects revenue of about $7.9 billion. That’s far less than the $8.98 billion that analysts were expecting, according to LSEG.

(PRO) 2025 expectations for European stocks
As the year draws to a close, major investment banks are presenting their outlook for the European market for 2025. Their views range from the cautiously optimistic to the more bullish, although almost all expressed concern over geopolitics and trade tensions.

Bottom line

Wednesday’s dramatic sell-off in the markets is a stark reminder that forecasts influence stock movements much more than current circumstances.

The Fed lowered its key interest rate by 25 basis points. Borrowing costs will fall and business investment should be stimulated, which should lead to job creation and increase growth. In turn, this in theory pushes the shares up.

But investors were already convinced of the Fed’s tapering on Wednesday. Ahead of the end of the Fed’s December meeting, the futures market indicated a 98% chance of a 25 basis point cut, according to CME FedWatch Tool. This means that investors had already priced the benefits of the interest rate cut into shares. In other words, yesterday’s cut would have little effect on share prices.

Investors may already be pricing in more than a single rate cut. A week ago, investors were betting on a 20.8% chance of the Fed cutting rates to 4%-4.25% in January.

Fed Chairman Jerome Powell dashed those hopes.

“With today’s action, we have lowered our policy rate by a full percentage point from the peak, and our policy stance is now significantly less restrictive,” Powell said at his post-meeting news conference. “We may therefore be more cautious when considering further adjustments to our policy rate.”

The possibility of a 25 basis point cut next month fell to 8.6%, according to the futures market, after the Fed released its updated dot plot indicating just two cuts for 2025.

It’s this shift — from hopes that the Fed will go full throttle with cuts to the reality that it might even take its foot off the accelerator — that is sending tremors through the markets.

To put it another way: It’s like waking up expecting a present on Christmas Day, only to find yourself bereft of presents. That disappointment wouldn’t happen at any other time of the year.

As David Russell, global head of market strategy at TradeStation, gloomily noted: “Goodbye punch bowl. No Christmas cheer from the Fed.”

— CNBC’s Daria Mercado, Jeff Cox, Yun Li, Brian Evans and Lisa Kailai Han contributed to this report.