(Bloomberg) — Stocks struggled near all-time highs ahead of the Federal Reserve rate decision, with traders split on the size of a central bank cut.
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The S&P 500 edged lower after briefly crossing the threshold of a record amid a surprise increase in US retail sales. Economically sensitive industries once again outperformed big tech. Treasury yields rose slightly, with shorter maturities leading the move. The market-implied odds that policymakers announce a 50-basis-point rate reduction on Wednesday were around 55%.
A survey conducted by 22V Research showed that expectations for the market reaction to the Fed decision are dependent on the bets on the size of the cut. Investors who expect a 25 basis-point reduction are split on whether that cut would deliver a “risk-on” or “risk-off” reaction. Meantime, those betting on 50 basis points think a smaller Fed move would be “risk-off.”
“If the Fed doesn’t initiate its easing cycle with 50 basis points, surely a 25 basis-point move will be enveloped by a dovish tone,” according to Quincy Krosby at LPL Financial. Ryan Detrick at Carson Group said “a larger cut out of the gate makes a lot of sense” given that now the big concern is the potential for a quickly slowing labor market.
Steve Sosnick at Interactive Brokers still believes the Fed should lean to 25 basis points, but notes that years of trading experience have taught him to respect the message of the market. And that message has been saying 50, he said.
Sosnick noted there will likely be widespread disappointment if the Fed opts for 25 basis points. He says equity markets always crave more liquidity, and at the same time, bond markets have all but priced in an aggressive rate cutting path for future meetings. So the smaller cut would bias against both.
The S&P 500 fell 0.1%. The Nasdaq 100 was little changed. The Dow Jones Industrial Average dropped 0.2%. The Russell 2000 of smaller firms gained 0.7%. Treasury 10-year yields advanced two basis points to 3.64%. The dollar rose.
The Fed will either cut 50 basis points or opt for a 25 basis-point reduction, but signal that they will be more aggressive going forward, according to Matt Maley at Miller Tabak.
Still, he says, that does not guarantee that the stock market and/or bond market will rally in a meaningful way. Maley says the Fed will likely try to convey that a more dovish stance is not seen as something that means they’re suddenly worried about an imminent recession.
“Therefore, given that the stock market is approaching overbought territory, we could still get a ‘sell the news’ reaction to the Fed this week,” he added.
Kristina Hooper at Invesco expects the Fed to cut by 25 basis points as a bigger reduction would raise alarm bells about the state of the US economy.
“Recall that the Fed started a brief easing cycle with a 50 basis point cut in March 2020 with the global pandemic upon us; it would be very hard to argue that the situation is so dire now,” she noted.
What Fed Chair Jerome Powell says in his press conference about the state of the US economy could help build confidence for those worried about a recession in the near term, Hooper added.
“In addition, it will be valuable to hear Powell’s thoughts on the expected path of rate cuts — in particular, what conditions could trigger a change of course, either a moderation or acceleration in easing,” she noted. “These are just things you can’t glean from the dot plot, so the press conference is ‘must see TV’ in my view.
The US economy remains on track for a soft landing, and the recent economic data are consistent with our view that the recession fears that triggered the early August selloff were overdone, according to Solita Marcelli at UBS Global Wealth Management.
“While we believe equity gains will broaden out, we also think there is room for growth stocks, in particular technology stocks, to rise further,” she said.
Marcelli also noted that while Fed rate cuts in non-recessionary periods have historically been favorable for equities overall, they also make growth stocks more attractive as lower rates increase the present value of these companies’ future cash flows.
Corporate Highlights:
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Microsoft Corp. raised its quarterly dividend 10% and unveiled a new $60 billion stock-buyback program, matching the size of a repurchase plan three years ago.
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Intel Corp. made a raft of announcements, spurring optimism that the chipmaker’s turnaround plan is starting to bear fruit.
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Salesforce Inc. is unveiling a pivot in its artificial intelligence strategy this week at its annual Dreamforce conference, now saying that its AI tools can handle tasks without human supervision and changing the way it charges for software.
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Newmont Corp., the world’s biggest gold miner, said it’s on track to raise $2 billion — if not more — from selling smaller mines and development projects.
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JPMorgan Chase & Co. is in discussions with Apple Inc. about taking over a credit card portfolio that rival Goldman Sachs Group Inc. has been trying to ditch.
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Snap Inc. Chief Executive Officer Evan Spiegel unveiled a new version of the company’s Spectacles smart glasses Tuesday, revitalizing an effort to build an advanced augmented reality product that may one day replace or rival the smartphone.
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Ozempic, the blockbuster diabetes shot made by Novo Nordisk A/S, is “very likely” to be one of the next drugs targeted for a price cut in bargaining with the US government’s Medicare program, a company executive said.
Key events this week:
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Eurozone CPI, Wednesday
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Fed rate decision, Wednesday
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UK rate decision, Thursday
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US US Conf. Board leading index, initial jobless claims, US existing home sales, Thursday
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FedEx earnings, Thursday
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Japan rate decision, Friday
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Eurozone consumer confidence, Friday
Some of the main moves in markets:
Stocks
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The S&P 500 fell 0.1% as of 3:37 p.m. New York time
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The Nasdaq 100 was little changed
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The Dow Jones Industrial Average fell 0.2%
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The MSCI World Index fell 0.2%
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S&P 500 Equal Weighted Index was little changed
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Bloomberg Magnificent 7 Total Return Index rose 0.3%
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The Russell 2000 Index rose 0.7%
Currencies
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The Bloomberg Dollar Spot Index rose 0.2%
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The euro fell 0.2% to $1.1116
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The British pound fell 0.5% to $1.3156
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The Japanese yen fell 1.1% to 142.23 per dollar
Cryptocurrencies
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Bitcoin rose 4.7% to $60,401.17
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Ether rose 3.7% to $2,358.38
Bonds
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The yield on 10-year Treasuries advanced two basis points to 3.64%
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Germany’s 10-year yield advanced two basis points to 2.14%
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Britain’s 10-year yield advanced one basis point to 3.77%
Commodities
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West Texas Intermediate crude rose 1.8% to $71.33 a barrel
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Spot gold fell 0.5% to $2,568.87 an ounce
This story was produced with the assistance of Bloomberg Automation.
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Source: finance.yahoo.com