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Markets fall as Fed rate cut in March becomes less likely

The Federal Reserve (Fed) left interest rates unchanged as expected at its first policy meeting of the new year, but comments by Fed Chair Jerome Powell about the timing of future cuts sent stocks spiraling lower. Additionally, markets were punishing some of the world’s largest tech companies as expectations for earnings have become so high that even the shares of companies beating Wall Street’s estimates are coming under pressure. In fixed-income markets, Treasury yields slipped after the US Treasury increased the amount of debt it is selling at its quarterly long-term auction next week.

Date: 1 February 2024
Author: Shane Strowmatt, LGT
Reading time: 5 minutes

US dollar bill with Federal Reserve signa

The Fed kept its key interest rate target range between 5.25% and 5.5% on Monday, a level reached in July for the first time in more than 2 decades. But market participants were focused mostly on Powell’s comments about the timing of future interest rate cuts. Powell noted that Fed is looking for a sustainable downward path for price increases in order to feel certain that inflation will remain sustainably below its 2% target. He also explicitly said that cuts at the central bank’s meeting in March are unlikely. Inflation in the US has been coming down, but remains above the Fed’s 2% target. The Core Personal Consumption Expenditures (PCE) price index - which strips out volatile food and energy prices and is the Fed’s preferred gauge of inflation in the US economy - up 2.9% in December when compared to the same month a year earlier. Recent strong labour market and consumer sentiment data have signalled that consumer spending - the driver of the US economy - may remain strong in 2024, making the Fed’s efforts to tame inflation more difficult.

In New York, stock indices plummeted after Powell’s comments as traders came to terms with higher rates for longer. The Dow Jones Industrial lost 0.8% and the S&P 500 dropped 1.6%. The Nasdaq-100 fell nearly 2%. The indices were already under pressure before Powell’s comments due to losses by several tech heavyweights. Shares of Microsoft (-2.7%), Alphabet (-7.4%) and AMD (-2.5%) all traded lower on Wednesday after company figures presented a day earlier were considered to be generally solid but failed to meet investors’ lofty expectations on revenue generated from artificial intelligence.

Danish pharma company Novo Nordisk became the second company ever in Europe to reach a market capitalisation of more than USD 500 billion on Wednesday after French luxury goods maker LVMH did the same last year. Novo Nordisk shares were up 3.7% on Wednesday after reporting fourth-quarter results that beat market expectations and saying revenue will stay high this year due to demand for its obesity drug Wegovy. The Euro Stoxx 50 was down 0.4%.

In the Asia-Pacific region, stock markets were mostly down except in Hong Kong and Korea. The Caixin Manufacturing Purchasing Managers’ Index (PMI) showed an expansion in factory activity in China for a third consecutive month in January. That contrasts with the results of the official PMI released a day earlier that showed a fourth month of contraction in a row in January. Hong Kong's Hang Seng Index was up 0.5%, while the Shanghai Composite lost 0.5%. South Korea’s Kospi gained 1.8% after the country reported that exports increased in January by the largest value in almost 2 years. In Tokyo, the Nikkei 225 dropped 0.9% and Australia’s S&P/ASX 200 1.2%.

In macroeconomics, the US labour market has been producing mixed signals recently. Despite a solid Job Openings and Labor Turnover Survey report from the Bureau of Labor Statistics released on Tuesday, which showed an increase in available jobs in the US at the end of 2023, the US ADP National Employment Report released a day later painted very different picture of the US labour market. Nonfarm employment increased by 107,000 jobs in January, down from 158,000 net hirings in December. Wage growth continued to fall to 5.2% in the first month of the year, according to the report.

Inflation in the euro area’s two largest economies decelerated at a faster pace than expected, causing market participants to pull forward their expectations for interest rate cuts by the ECB into the spring. The Consumer Price Index for Germany increased at 3.1% in January, down from 3.8% in December. France also reported its lowest inflation in two years at 3.4%.

Corporate news in focus: Quarterly figures from ABB, Amazon, Apple, BNP, Deutsche Bank, ING, Julius Baer, Merck & Co., Meta Platforms, Mitsubishi, OMV, Roche, Sanofi, Siemens Healthineers, Shell.

Economic data in focus: Manufacturing Purchasing Managers’ Indices from various countries throughout the day; OPEC meeting; Swedish central bank interest rate decision; euro area consumer prices; euro area unemployment; Italian CPI; Bank of England interest rate decision; US weekly initial jobless claims.

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
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