Stocks Plunge on a Hawkish Fed

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -2.95%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -2.58%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -3.60%.  Dec E-mini S&P futures (ESZ24) are down -3.14%, and Dec E-mini Nasdaq futures (NQZ24) are down -3.97%.

Stock indexes on Wednesday sold off sharply, with the S&P 500 posting a 4-week low, the Dow Jones Industrials falling to a 6-week low, and the Nasdaq 100 posting a 2-week low.  Stocks were hammered Wednesday afternoon, and bond yields soared even after the FOMC cut the fed funds target range by an expected -25 bp but signaled only 50 bp of rate cuts next year, fewer than 100 bp of rate cuts projected in September. The FOMC also raised its US GDP and inflation estimates for this year and next, suggesting a more restrictive monetary policy.  Stock prices sank to their lows Wednesday afternoon when Fed Chair Powell said the FOMC will be more cautious as it considers further adjustments to policy, suggesting the Fed may keep policy tighter for longer.

Wednesday’s US housing news was mixed.  Nov housing starts unexpectedly fell -1.8% m/m to 1.289 million, weaker than expectations of an increase to 1.345 million. However, Nov building permits, a proxy for future construction, rose +6.1% m/m to a 9-month high of 1.505 million, stronger than expectations of 1.430 million.

The US Q3 current account deficit was a record -$310.9 billion, wider than expectations of -$287.1 billion.

US MBA mortgage applications fell -0.7% in the week ended December 13, with the purchase mortgage sub-index up +1.4% and the refinancing mortgage sub-index down -2.6%.  The average 30-year fixed rate mortgage rose +8 bp to 6.75% from 6.67% in the prior week.

The FOMC, as expected, cut the fed funds target range by -25 bp to 4.25%-4.50% and said risks to labor and inflation goals are roughly in balance. 

The Fed's dot plot of interest rate projections shows the year-end 2025 median fed funds rate at 3.875%, up from a Sep projection of 3.375%, implying only two 25 bp rate cuts next year.

The FOMC raised its 2024 US GDP estimate to 2.5% from 2.0% in Sep and its 2025 GDP forecast to 2.1% from 2.0%.  The FOMC cut its 2024 US unemployment rate forecast to 4.2% from 4.4% in Sep and lowered its 2025 unemployment rate forecast to 4.3% from 4.4%.  The FOMC raised its 2024 core PCE forecast to 2.8% from 2.6% in Sep and its 2025 core PCE forecast to 2.5% from 2.2%.

Fed Chair Powell said we still have some work to do on inflation and need a restrictive monetary policy to reach our inflation goal.

The markets are awaiting key inflation data on Friday with the Nov core PCE price index, the Fed’s preferred inflation gauge, to see if policymakers can continue cutting interest rates.  The Nov core PCE is expected to rise to +2.9% y/y from +2.8% y/y in Oct.

The markets are discounting the chances at 6% for a -25 bp rate cut at the January 28-29 FOMC meeting.

Overseas stock markets on Wednesday settled mixed.  The Euro Stoxx 50 closed up +0.30%.  China's Shanghai Composite Index closed up +0.62%. Japan's Nikkei Stock 225 fell to a 1-week low and closed down -0.72%.

Interest Rates

March 10-year T-notes (ZNH25) Wednesday closed down -28.5 ticks.  The 10-year T-note yield rose +10.3 bp to 4.502%.  Mar T-notes Wednesday tumbled to a 1-month low, and the 10-year T-note yield jumped to a 6-1/2 month high of 4.518%.  T-notes sold off Wednesday despite the Fed cutting the fed funds target range by -25 bp after they signaled only 50 bp of rate cuts next year, down from 100 bp of rate cuts projected in Sep.  T-notes also came under pressure after the FOMC raised its US GDP and core PCE price estimates for this year and next.  In addition, hawkish comments from Fed Chair Powell knocked T-note prices lower when he said the Fed needs to maintain a restrictive policy to reach its inflation target. 

European government bond yields Wednesday moved higher.  The 10-year German bund yield rose +1.5 bp to 2.245%.  The 10-year UK gilt yield climbed to a 5-week high of 4.577% and finished up +3.4 bp to 4.558%.

Eurozone Nov CPI was revised lower to +2.2% y/y from the previously reported +2.3% y/y.  Nov core CPI remained unchanged at +2.7% y/y.

Eurozone Oct construction output rose +1.0% m/m, the largest increase in 21 months.

UK Nov CPI rose +2.6% y/y, which is right on expectations.  Nov core CPI rose +3.5% y/y, weaker than expectations of +3.6% y/y.

Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB at its January 30 policy meeting and a 14% chance for a 50 bp rate cut at the same meeting.

US Stock Movers

Chip stocks gave up early gains Wednesday and sold off, weighing on the broader market.  Broadcom (AVGO) and Marvell Technology (MRVL) closed down more than -6%.  Also, Intel (INTC) closed down more than -5%, and ARM Holdings Plc (ARM), Micron Technology (MU), and ON Semiconductor (ON) closed down more than -4%.  In addition, NXP Semiconductors (NXPI), GlobalFoundries (GFS), KLA Corp (KLAC), and Microchip Technology (MCHP) closed down more than -3%.

Mega-cap technology stocks retreated Wednesday.  Tesla (TSLA) closed down more than -8%.  Also, Amazon.com (AMZN) closed down more than -4% to lead losers in the Dow Jones Industrials.  In addition, Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), and Netflix (NFLX) closed down more than -3%. 

Heico (HEI) closed down more than -8% after reporting Q4 net sales of $1.01 billion, weaker than the consensus of $1.05 billion.  Jeffries downgraded the stock to hold from buy with a price target of $32. 

Rivian Automotive (RIVN) closed down more than -11% after Baird downgraded the stock to neutral from outperform. 

Lamb Weston Holdings (LW) closed down more than -4% after Post Holdings acquired Potato Products of Idaho LLC instead of acquiring Lamb Weston.

Electronic Arts (EA) closed down by -3% after Stifel downgraded the stock to hold from buy. 

Fluor Inc (FLR) closed down more than -6% after Baird downgraded the stock to neutral from outperform. 

Eastman Chemical (EMN) closed down more than -4% after Citigroup downgraded the stock to neutral from buy.

Jabil Inc (JBL) closed up more than +7% to lead gainers in the S&P 500 after reporting Q1 net revenue of $6.99 billion, stronger than the consensus of $6.59 billion and forecast Q2 net revenue of $6.1 billion-$6.7 billion, the midpoint above the consensus of $6.29 billion. 

Recently beaten-down health insurance stocks rebounded on Wednesday.  Cigna Group (CI) closed up more than +6%, and UnitedHealth Group (UNH) closed up more than +2% to lead gainers in the Dow Jones Industrials.  Also, CVS Health (CVS), Humana (HUM), and Centene (CNC) closed up more than +2%.  In addition, Molina Healthcare (MOH) closed up more than +1%.

Huntington Ingalls Industries (HII) closed up +0.49% after TD Cowen said an agreement by US lawmakers to a “complicated” continuing resolution and emergency funding package could be a positive for the company.

Earnings Reports (12/19/2024)

Accenture PLC (ACN), CarMax Inc (KMX), Cintas Corp (CTAS), Conagra Brands Inc (CAG), Darden Restaurants Inc (DRI), FactSet Research Systems Inc (FDS), FedEx Corp (FDX), Lamb Weston Holdings Inc (LW), NIKE Inc (NKE), Paychex Inc (PAYX).