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US stocks closed little changed as a rebound from the previous day’s sell-off flopped with a hawkish outlook from the Federal Reserve on its path for interest rates looming over markets.
The Dow Jones Industrial Average (^DJI) ended a 10-day losing streak, its longest in 50 years, as it closed just above the flat line on Thursday. Meanwhile, the S&P 500 (^GSPC) and tech-heavy Nasdaq Composite (^IXIC) both fell about 0.1%.
The 10-year Treasury yield (^TNX) continued its trek higher on Thursday, rising roughly seven basis points to hit 4.57% for its highest levels since May.
Markets were looking to bounce back after a harsh reaction the day before, which was prompted by the Fed scaling back the number of rate cuts it expects next year and Chair Jerome Powell saying Wednesday’s decision — cutting rates by a quarter point — was a “closer call.”
Markets interpreted the Fed’s moves as a “hawkish cut” and reacted accordingly, sending the S&P 500 and Nasdaq to their worst days since the summer.
On the economic front, the third estimate for third quarter US GDP showed the economy grew at an annualized rate of 3.1%, above the previous reading of 2.8%. Other data out Thursday morning showed 220,000 weekly unemployment claims were filed in the week ending Dec. 14, a decrease from the 242,000 seen the week prior.
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FedEx stock rises more than 9% after announcing plan to separate FedEx Freight
FedEx (FDX) plans to spin-off FedEx Freight into its own publicly traded company, the company said as part of its earnings release after the close on Thursday.
FedEx said the separation is expected to be executed in the next 18 months.
Also on Thursday night, FedEx trimmed its full-year adjusted earnings per shares guidance to a range of $19 to $20 from a prior range of $20 to $21. In the prior quarter, FedEx reported earnings of $4.05 above Wall Street’s estimates of $3.98 per share.
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Market rebound flops after Wednesday’s sell-off
Stock futures opened higher after a brutal sell-off on Wednesday pointing to a rebound in the equity market on Thursday. And midway through the trading day, that looked like a possibility.
But investors sold equities into the close again on Thursday. After all three of the major averages had been up at least 0.5% at one point, the S&P 500 (^GSPC) and Nasdaq Composite (^IXIC) fell about 0.1%. Meanwhile, the Dow Jones Industrial Average (^DJI) closed just above the flat line to end its longest stretch of consecutive losing trading session in 50 years.
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All eyes on PCE
Investors on Friday will closely be monitoring a key inflation print set to shape future monetary policy.
The Federal Reserve’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) index, which strips out volatile food and energy costs, is expected to have risen 0.2% month over month in November after prices rose 0.3% in October, according to Bloomberg data.
Over the prior year, Wall Street expects core prices to rise 2.9%, ahead of the 2.8% gain seen in October.
Overall PCE is expected to increase 2.5% year over year, an acceleration from October’s 2.3% annual increase.
The report, which will be released at 8:30 a.m. ET on Friday, comes after the central bank slashed interest rates by 25 basis points at its last policy meeting of the year on Wednesday. Officials also signaled less easing to come in 2025 with inflation expected to remain elevated over the longterm.
In a press conference following Wednesday’s interest rate decision, Federal Reserve Chair Jerome Powell indicated that the last mile of the Fed’s fight to curb inflation has been more challenging than central bank leaders initially projected.
“We’ve had a year-end projection for inflation, and it’s kind of fallen apart as we approach the end of the year,” Powell said. “I can tell you that might be the single biggest factor — inflation has once again underperformed relative to expectations.”
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Markets are pricing in just one interest rate cut in 2025
The Federal Reserve’s median projection forecasted two interest rate cuts for 2025. Markets, as they often do on either side of the coin, took the Fed’s hawkish tone a step further.
For the first time this year, markets are pricing just one interest rate cut in 2025. As seen in the chart below it’s a far cry from how optimistic markets were back on the day of the Fed’s 50 basis point rate cut.
But what’s interesting to consider is the market action over the past three months. The S&P 500 (^GSPC) has risen about 5% while markets have priced out about 100 basis points worth of rate cuts for 2025.
And Wednesday’s press conference only took out one more interest rate cut from market pricing than was seen before the Fed meeting. So what gives? Why the panic sell-off? Strategists told Yahoo Finance it has more to do with the increased uncertainty about the path forward for interest rates in 2025.
“There is a degree of just more elevated uncertainty and maybe trepidation because the Fed is going to have to be in this reactive position,” Charles Schwab senior investment strategist Kevin Gordon said. “It’s not like they’ve gotten out of data dependence mode, but I think it puts them back into a hyper data dependence mode where every single jobs report and every single inflation report now is going to be scrutinized.”
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Apollo’s Sløk sees 40% chance of a rate hike in 2025
Federal Reserve Chair Jerome Powell didn’t rule out an interest rate hike during his press conference on Thursday. Though, he didn’t confirm a rate increase is on the horizon either.
“You don’t rule things completely in or out in this world,” Powell said. “That doesn’t appear to be a likely outcome.”
Apollo’s chief economist, Torsten Sløk, believes there’s an increasing chance the Fed will need to hike in 2025. (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
The strong economy, combined with the potential for lower taxes, higher tariffs, and restrictions on immigration, has increased the risk that the Fed will have to hike rates in 2025,'” Sløk wrote in a note to clients on Thursday. “We see a 40% probability that the Fed will raise interest rates in 2025.”
Sløk highlighted a chart of gross domestic product (GDP) when pointing out that “the economy is still strong and interest rates will stay higher for longer.” On Thursday, the third estimate of third quarter GDP showed the US economy grew at an annualized pace of 3.1% during the period, above the prior estimate of 2.8% growth.
Sløk added: “For investors, it is starting to look similar to 2022 — too high inflation, rising interest rates, and falling stock prices. The bottom line is that there are significant downside risks to the 60/40 portfolio as we enter 2025.”
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10-year Treasury yield hits highest level since May
The 10-year Treasury yield (^TNX) continued its trek higher on Thursday, rising roughly nine points to hit 4.58% for the first time since May as investors adjust for a higher-for-longer interest rate stance from the Federal Reserve.
Eventually, higher bond yields can be a headwind for stocks. Piper Sandler chief investment strategist Michael Kantrowitz told Yahoo Finance a rough line in the sand for the 10-year is at 4.5%. Above those levels, yields could start to weigh on many areas of the market.
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Mortgage rates ticked up this week despite latest Fed cut
Mortgage rates rose this week in the run-up to the Federal Reserve’s latest interest rate cut.
The average 30-year mortgage rate was 6.72% in the week through Wednesday, compared with 6.6% a week earlier, according to Freddie Mac data. The average 15-year mortgage rate was 5.92%, from 5.84%.
Much of Freddie Mac’s survey was conducted before the Federal Reserve trimmed benchmark interest rates by 25 basis points on Wednesday and signaled that it may only cut rates twice in the next year. The dimmer prospects for additional cuts in 2025 sent Treasury yields and mortgage rates higher.
As of Wednesday afternoon, the average 30-year mortgage rate was 7.13%, according to Mortgage News Daily.
“This week, mortgage rates crept up to a similar average as this time in 2023,” said Sam Khater, Freddie Mac’s chief economist. “Homebuyers are slowly digesting these higher rates and are gradually willing to move forward with buying a home, resulting in additional purchase activity.”
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Financials, Utilities lead rally as Tech also rises
The Financials (XLF) and Utilities (XLU) sectors were both up more than 1% leading the S&P 500 (^GSPC) higher on Thursday. Technology (XLK) and Communication Services (XLC) were also outperforming the index as a rally in large cap took hold.
Nvidia (NVDA) rallied more than 3% while Amazon (AMZN) popped more than 2%. Tesla (TSLA)was the lone “Magnificent Seven” stock in the red, falling more than 1% after sliding nearly 10% the day prior.
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Government shutdown odds are rising. Economic experts aren’t panicking (yet).
Yahoo Finance’s Ben Werschkul reports:
Washington could be barreling toward yet another spending crisis, but the initial reaction from economic watchers was to focus on the notion that perhaps not all self-inflicted wounds are equal.
The rising odds of a shutdown came after a deal to avert a government stoppage fell apart dramatically on Wednesday afternoon amid opposition from Elon Musk followed by President-elect Donald Trump.
The revolt led House Speaker Mike Johnson to pull back on a deal he had negotiated with Democrats. Lawmakers are now starting anew, less than 48 hours from when a shutdown would begin.
A shutdown would have varied economic effects — and will definitely be taken note of by rating agencies looking at US creditworthiness — but analysts late Wednesday and early Thursday often focused on how the damage could be limited if it comes to pass at all.
“While the latest developments raise the odds of a government shutdown, a protracted shutdown looks unlikely in our view,” wrote analysts at Goldman Sachs late Wednesday.
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Micron stock plummets as weak outlook overshadows AI opportunity
Micron (MU) stock plummeted 19% early Thursday on weaker-than-expected guidance for the February quarter despite burgeoning demand for AI chips.
The memory chipmaker, which counts Nvidia (NVDA) as a major customer, said Wednesday it expects revenue between $7.7 billion and $8.1 billion for the current quarter. Wall Street analysts had expected the company to guide for revenue of $9 billion, according to Bloomberg consensus estimates.
Micron’s outlook points to a trend across the chip industry: Sales of semiconductors used for artificial intelligence are growing fast, while traditional chip sales slump. For example, Micron said that while its high-bandwidth memory (HBM) chips rose more than 50% in the November quarter, revenue from its chips for mobile phones fell 19%.
Micron’s HBM chips are used in Nvidia’s latest Blackwell GPUs (graphics processing units), which hyperscalers use in data centers to power both their customers and their own artificial intelligence workloads. Blackwell demand is expected to soar in the upcoming year.
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The Fed’s ‘pivot’ brought market uncertainty to the forefront
Markets sold off on Wednesday as Federal Reserve Chair Jerome Powell explained why the central bank is expecting to cut interest rates less than expected.
Wall Street investment strategists argue the “hawkish” shift by the Fed, from a clear easing bias to one with more uncertainty over when and how much further rates will be lowered, likely drove the negative sentiment in markets.
“The hawkish turn, plus the fact that we’re starting to get more dissent [among officials] now, that uncertainty doesn’t really bode well, especially when you’re heading into a year where there’s just this dramatic policy uncertainty around inflation, but also the labor market,” Charles Schwab senior investment strategist Kevin Gordon told Yahoo Finance.
Piper Sandler chief investment strategist Michael Kantrowitz told Yahoo Finance the Fed’s “hawkish tone” was an “extrapolation” of recent moves in the market when few stocks had been rising higher within the S&P 500 as markets had begun pricing in the prospects of higher interest rates and sticky inflation for most of December.
“I would almost describe this as a bit of a light pivot from Powell, certainly from a second derivative,” Kantrowitz said. “And as we know, markets care about derivatives or rates of change in anything.”
Given stock’s roaring bull market rally, and investor sentiment shooting high since Donald Trump’s election win, the “light pivot” from Powell was enough to push markets over the edge.
“It’s sort of a textbook case of you have really euphoric, sometimes somewhat exuberant, sentiment, and then a negative catalyst comes along to tip the market over,” Gordon said. “And that’s exactly what the Fed meeting was.”
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Stocks bounce back at the open
US stocks rebounded on Thursday from the previous day’s sell-off that was fueled by a hawkish outlook from the Federal Reserve on its path for interest rates.
The Dow Jones Industrial Average (^DJI) was up more than 0.8%, after 10 straight losing sessions. Meanwhile, the S&P 500 (^GSPC) rose about 0.9%, and tech-heavy Nasdaq Composite (^IXIC) rallied more than 1%.
All 11 sectors of the S&P 500 were in the green, led by a more than 1.6% surge in Financials (XLF).
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GDP revised higher for Q3, jobless claims fall
The US economy grew at a faster pace than initially expected in the third quarter.
The Bureau of Economic Analysis’s third estimate of third quarter US gross domestic product (GDP) showed the economy grew at an annualized pace of 3.1% during the period, above the 2.8% growth in the second estimate. Economists surveyed by Bloomberg had expected Thursday morning’s GDP reading to remain unchanged.
Also out Thursday, weekly jobless claims fell more than expected with 220,000 filings in the week ending Dec. 14, down from the 242,00 seen the week prior and below the 230,000 economists had expected.
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