Markets

US Stocks and Bonds Decline After Fed Pivot: Weekly Market Summary

Published December 23, 2024

This week, major US stock indexes experienced their worst performance since mid-November, largely influenced by the Federal Reserve’s cautious tone regarding future interest rate cuts. As a result, there was a notable sell-off in Treasury bonds, marking a second consecutive week of declines.

On Friday, the S&P 500 and the Nasdaq 100 managed to recover some losses, showing gains that softened what could have been a more significant weekly decline. The rise was supported by new data that alleviated some inflation worries. Despite this, Bloomberg’s dollar gauge recorded its largest drop this month but remained up for the third week in a row. Although Treasury yields dropped slightly on Friday, the 10-year yield increased by over 10 basis points throughout the week.

The pivot from the Fed occurred on Wednesday when it reduced its expectations for interest rate cuts in 2025, which caught many in the market off guard. Strengthening economic data reinforced the Fed's cautious stance. With Fed Chair Jerome Powell emphasizing the importance of inflation control, data released on Friday concerning personal consumption expenditures showed signs of economic cooling, likely providing some reassurance to both investors and policymakers.

Art Hogan, chief market strategist at B. Riley Wealth, commented that the reaction to the Fed’s decision was likely an overreaction, as a slower rate of cuts could actually be a positive sign reflecting stronger economic fundamentals.

Looking ahead, the Fed is expected to adopt a wait-and-see approach, taking into account how upcoming tariff and immigration policy changes unfold. According to Olu Sonola, head of US economic research at Fitch Ratings, this uncertainty suggests that the Fed might hold off on further cuts in January. Chris Larkin, managing director at E*Trade from Morgan Stanley, echoed this sentiment, indicating that January is likely to see a pause in rate cuts.

Additionally, concerns around a potential US government shutdown have started to mount. House Republicans planned to vote on funding to keep the government operating until March 14, which also includes economic aid for farmers and disaster relief.

Jeanne Asseraf-Bitton, head of research and strategy at BFT IM in Paris, noted that the surprise nature of both the Fed's decision and the looming shutdown have created a challenging atmosphere for the markets.

Despite these challenges, US consumer sentiment improved for a fifth consecutive month in December. The sentiment index is reflecting a better outlook among Republicans following the previous month's elections, while attitudes among Democrats have turned more negative.

Moreover, Friday saw a significant quarterly options expiration event, termed “triple-witching,” which tends to create market volatility. This year, the largest amount—approximately $6.5 trillion—of options related to individual stocks, indexes, and exchange-traded funds were set to expire, contributing to the week’s tumultuous trading conditions.

Market Movements

Some key market performances include:

The S&P 500 experienced a rise of 1.1% by the end of trading on Friday.
The Nasdaq 100 increased by 0.8%.
The Dow Jones Industrial Average gained 1.2%.
The MSCI World Index rose by 0.8%.

Currency Trends

In currency markets, significant movements included:

The Bloomberg Dollar Spot Index fell by 0.5%.
The euro strengthened, rising by 0.6% to $1.0428.
The British pound also increased by 0.6% to $1.2575.
The Japanese yen gained 0.7%, reaching 156.32 per dollar.

Cryptocurrency Fluctuations

In the cryptocurrency markets, notable changes were:

Bitcoin saw a decrease of 2%, dropping to $95,420.2.
Ether declined by 0.7% to $3,393.53.

Bond Yields

Key bond market movements included:

The yield on 10-year Treasuries fell by four basis points, settling at 4.53%.
Germany’s 10-year yield decreased by two basis points to 2.29%.
The UK’s 10-year yield declined by seven basis points to 4.51%.

Commodity Changes

In commodities, the following trends were observed:

West Texas Intermediate crude increased by 0.2%, reaching $69.51 a barrel.
Spot gold rose by 1.2%, trading at $2,623.86 an ounce.

This summary provides a comprehensive overview of the recent market dynamics following the Federal Reserve's policy shift and highlights the influencing economic factors and market reactions.

stocks, bonds, economy