Financial markets showed signs of recovery in early Thursday trading after experiencing their steepest post-Federal Reserve meeting decline on record Wednesday. The previous day’s selloff, which wiped approximately $1.8 trillion in market value from the S&P 500, came in response to the Federal Reserve’s unexpectedly conservative stance on potential rate cuts for the coming year.
The central bank’s final meeting of the year produced guidance suggesting only two interest rate reductions through 2025,
significantly fewer than their September projections, citing ongoing inflation concerns despite a robust domestic economy. This hawkish outlook triggered substantial market movements, with the S&P 500 retreating to its lowest point in a month.
LPL Financial’s chief technical strategist Adam Turnquist noted that the Fed’s position has reintroduced uncertainty regarding next year’s monetary policy landscape. He suggested that market expectations are now adjusting to accommodate a more gradual and limited rate-cutting cycle than previously anticipated.
In the bond market, yields saw significant movement, with the benchmark 10-year Treasury note yield climbing to 4.522% in overnight trading, up from 4.391% before the Fed’s announcement. Two-year notes settled at 4.319%. The dollar index, despite reaching a two-year peak against major currencies following the Fed decision, showed a slight retreat of 0.13% to 107.892.
Early indicators pointed to a modest market recovery, with S&P 500 futures suggesting a 13-point increase at the opening bell. The Dow Jones Industrial Average, which had marked its longest losing streak since 1974 with ten consecutive down sessions, appeared poised for an 85-point gain. Nasdaq futures indicated a 50-point advance.
Individual stocks drawing attention included Micron Technology, whose shares declined 15% in pre-market activity following disappointing forward guidance for the memory chip sector in their quarterly earnings report. FedEx shares showed minimal movement, edging up 0.11% ahead of their second-quarter earnings announcement scheduled for after market close.
European markets reflected the impact of Wall Street’s decline, with the Stoxx 600 falling 1.33% in Frankfurt and London’s FTSE 100 dropping 1.4% before the Bank of England’s rate decision.
In Asian markets, the Bank of Japan maintained its current interest rate policy at its year-end meeting, with Governor Kazuo Ueda indicating that January rate increases were unlikely. This
announcement prompted a sharp decline in the yen versus the dollar. The Nikkei 225 closed down 0.69%, while the broader MSCI ex-Japan index fell 1.4%.
Treasury yields continue to present a potential headwind for equity markets, according to market analysts, who suggest that the Federal Reserve’s more cautious approach to rate adjustments could extend the current period of higher rates. This stance marks a significant shift from earlier market expectations, which had anticipated a more aggressive rate-cutting schedule for 2024.
The market’s reaction underscores the delicate balance the Federal Reserve must maintain between controlling inflation and supporting economic growth, with investors now recalibrating their expectations for monetary policy in the coming year. The central bank’s commitment to maintaining a careful approach to policy adjustments suggests a potentially extended period of market adjustment as participants align their strategies with this new outlook.