Michael Reinking:
Hello, I'm Michael Reinking, senior market strategist of the New York Stock Exchange, and this is Market Storylines. Every week, we are here to keep you up to date on the key trends and events driving global markets. As 2024 draws to a close, this is the final full trading week of the year, and it has been a volatile one, so let's get to this week's Market Storylines.
The big story of the week, and the source of all that volatility, was the Federal Reserve's rate decision on Wednesday. In last week's episode, we highlighted that the economic data and employment data largely were coming in better than expected, along with the recent inflation data suggesting that the disinflationary process had stalled out. So it was our expectation, along with most of the street, that the Federal Reserve would deliver a hawkish cut, signaling fewer cuts next year and suggesting that they would proceed cautiously going forward.
Now, I'll walk through the details, but at a very high level, that was pretty much what they did. The committee cut rates by 25 basis points, taking the upper end of the Fed Fund's target to four point a half percent, bringing the totality of rate cuts since September to 1%.
Now, the only change to the language in this statement was in the forward guidance, where the qualifier, the extent and timing of additional adjustments to the target, was added. Now, this firmly put a pause, potentially an extended one, on the table. Now, there was also one dissension on the committee, with Cleveland Fed President Beth Hammack, who joined the committee in August, preferring to leave rates unchanged. And when looking at the dots in the summary of economic projections, you could see there were at least three other officials that shared that opinion, publicly at least. Now, the dots showed the median expectation for the Fed to cut only two additional times next year down from four at the September meeting, with two more in 2026. Now, this was what futures markets were implying ahead of the meeting as well.
Now, the projection for next year's real GDP was revised of slightly, while the unemployment rate moved a tick lower to 4.3%. However, there were big adjustments to the inflation projections, with both headline and core PCE expected to be at two point a half percent, up from 2.1 and 2.2% respectively, with core PCE not expected to hit the Fed's 2% target until 2027.
Now, there was also a big clue deeper in the SEP when looking at the balance of risks where the committee now believed that the risks to employment were broadly balanced from weighted to the upside. But 15 of 19 officials now believe the risks to inflation were weighted to the upside, up from only four in September, which also signaled a much more significant shift than what had been communicated before the Fed's media blackout window.
Now, this is where markets had focused. Now, the Fed has a dual mandate to promote maximum employment and stable prices. Throughout 2022, 2023, and most of this year, the focus was solely on the inflation fight. However, at the end of the summer, the committee told us that they were now focused on the employment side of the mandate, which led them to begin cutting rates. With yesterday's announcement and communication, it became clear that the pendulum has once again swung back in the other direction.
Now, there was quite a bit of mixed messaging coming from the chairman during the press conference, but much of the communication was in line with what we've heard from officials recently. Chair Powell suggested that the economy remains strong, the labor market conditions are easing, but had exceeded expectations and they were not a source of inflationary pressure, while also pointing to some of the silver linings that we discussed in last week's inflation data.
So the question is, where is that concern coming from? And that is where the press conference got a bit more interesting. The chairman highlighted that some officials had begun including the potential impact of Washington policy into their projections, which is a piece of what drove the inflation projections higher. And when prompted by a question, he pointed to the Fed's Tealbook from 2018 as to how the Fed may think about and react to tariffs going forward. So it is very clear that the committee is thinking about and planning for changes to the economy and their reaction function.
Beyond the shift in focus back to inflation, the other major message Chair Powell tried to deliver was that now that rates were less restrictive after the recent rate cuts, and with the uncertainty, the committee would be cautious in moving policy going forward, something officials had been messaging previously as well.
Now, the analogy also shifted from pulling a boat into port to slowing down when you're driving in the fog, which I guess was an acknowledgement of that uncertainty. Now, yields in the US dollar both move sharply higher after the release and extended to the upside during the press conference, with Treasury yields up over 10 basis points across the curve. Now equity markets sold off sharply, with the S&P 500 falling nearly 3% with broad-based weakness.
Now, as I said before, there really wasn't anything that was too surprising coming out of the meeting, and the reaction seemed very aggressive. That was enough to make me go back and look at everything a second time to make sure there wasn't something I was missing, and I don't think there was, but there were clearly other factors at play. And first off, I'd like to highlight that markets like certainty and after yesterday, there seemed to be more questions about policy going forward than answers.
Now, heading into the rate decision, we've talked about the deterioration of breadth within the market, with strengthened mega cap tech stocks masking the weakness beneath the surface. Earlier this week, Deutsche Bank out an interesting stat. Coming into yesterday, within the S&P 500, the number of declining stocks in the index had outpaced the number of advances for 12 consecutive days, the longest streak since 1978. Despite that underlying weakness, the S&P 500 was holding within 1% of its all time high. Now, there was some expectation that yesterday would be a clearing event to help to resolidify the rally heading into a positive seasonal time period for markets into the end of the year. However, as the chairman didn't walk back some of the hawkishness coming out of the prepared materials, it seemed that traders began to throw in the towel, reducing exposure after a strong year, and heading into a period where liquidity begins to dry up. Now, as major indices began to break through round numbers, the fact that it is options expiration this week likely added to that downside momentum.
Now, I'd also highlight that late in yesterday's session, the proposed stopgap funding bill in Congress also fell apart. Now, this weighed on sentiment as it highlights the slim margins in Congress and just how difficult it will be to pass through some of President Trump's agenda next year. Now, today, we are getting a modest bounce, but there doesn't seem to be a lot of conviction. Now, the question from here is whether the Santa Claus rally will come to save the day, with the official count for that rally beginning next Tuesday.
Now, looking ahead, Friday is the last big liquidity event of the year, and it's triple witch expiration and the S&P quarterly index rebalances, the closing auctions associated with that event have consistently been setting records, with Q3's September closing auction, the largest in history, with nearly 3.1 billion shares trading. Now, there isn't too much on the calendar next week with the holiday, and I'd expect attendance and volumes to wane. We will probably hear from a few Fed officials to try and refine some of the messaging, which has left a lot of questions.
With that, on behalf of the New York Stock Exchange, I'd like to wish you and your families a happy and healthy holiday season. Once again, thank you for spending some time with us today. Remember, you can watch market storylines on tv.nyc.com or our YouTube channel, or you can listen every Friday on the Inside the ICE House podcast feed. Thanks for joining me. I'm Michael Reinking. I'll talk to you again soon.
Speaker 2:
That's our conversation for this week. Remember to rate, review and subscribe wherever you listen, and follow us on X at ICEHousePodcast. From the New York Stock Exchange, we'll talk to you again next week inside the ICE House.
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