US Stocks and Bonds Decline Following Fed's Cautious Stance: A Market Overview

This past week marked one of the worst periods for major US stock indexes since mid-November, sparked by the Federal Reserve’s more cautious outlook on interest rate cuts for the next year. Following this news, Treasuries experienced a sell-off for the second week in a row.

On Friday, however, the S&P 500 and Nasdaq 100 made gains, which helped to ease what could have been a more significant decline for the week. Fresh economic data appeared to soothe inflation worries. Notably, the Bloomberg Dollar Gauge recorded its most substantial decrease this month, yet it has still been on an upward trend for three consecutive weeks. While Treasury yields saw a dip across the board on Friday, the 10-year yield noticeably increased by over 10 basis points throughout the week.

The Fed’s announcement on Wednesday was a turning point for the markets, indicating a reduction in the expected number of rate cuts for 2025. Continuous reports showcasing the strength of the economy supported the Fed's views. Fed Chair Jerome Powell’s focus on curbing inflation was underscored by the weaker personal consumption expenditures data for November, which was released on Friday. This data seemed to provide both policymakers and investors reassurance that the economy, while strong, is still showing signs of cooling.

Art Hogan, chief market strategist at B. Riley Wealth, commented, “I don’t know why we always have to be reminded that the Fed not cutting rates — or not cutting rates as fast — is actually good news if it’s driven by stronger economic data, and that’s exactly what the Fed is telling us.” He referred to the market's reaction post-Fed meeting as a potential “major overreaction.”

Looking ahead, the Fed appears to be taking a wait-and-see approach, considering how upcoming tariffs and immigration policies will unfold in the next few months before deciding on further rate cuts. Chris Larkin from E*Trade Morgan Stanley stated that the odds are leaning towards a pause on rate cuts in January, as the central bank navigates these uncertainties posed by the incoming administration.

In addition to these economic currents, there are rising concerns regarding a possible government shutdown in the US. House Republicans have announced plans to vote on funding related to keeping the government operational until March 14, which also includes disaster relief and financial aid for farmers.

Jeanne Asseraf-Bitton, head of research and strategy at BFT IM in Paris, stated, “The real problem is the shutdown, one wasn’t expecting this, it’s a surprise for the market, just as the Fed was a surprise.” Overall, she described the week as a challenging one for the markets.

Despite these challenges, US consumer sentiment has risen for the fifth consecutive month in December. The sentiment index reflects a more optimistic outlook among Republicans following the recent elections, while Democrats appear more pessimistic.

Friday marked a typical turbulent day in the markets, with the expiration of US options adding instability. Known as the “triple-witching” day, approximately $6.5 trillion in options tied to individual stocks, indexes, and exchange-traded funds were set to expire, indicating a significant event within the market.

In international markets, Brazil's stocks saw a rebound after aggressive central bank actions to stabilize the currency, with the Brazilian real performing well among its emerging market counterparts on Friday.

In the UK, long-term borrowing costs are nearing the highest levels observed since 1998, as investors grapple with how the Bank of England will adjust interest rates in the coming year. In just a week, the market's expectations fluctuated from anticipating four rate cuts to reconsidering that number down to fewer than two.

In Asia, China's one-year bond yield fell to 1% for the first time since the global financial crisis, signaling traders' increasing expectations for monetary easing.

Meanwhile, the Japanese yen reduced its weekly losses as Japan's key inflation measurement strengthened for the first time in three months, with Finance Minister Katsunobu Kato warning against currency speculation.

Crude oil also experienced a weekly decline as traders weighed the Fed’s hawkish shift alongside President-elect Donald Trump’s threats to levy tariffs on EU countries unless they increase imports of US oil and gas.

The following highlights represent the key market movements this week:

Stocks Performance

• The S&P 500 rose by 1.1% as of 4:14 PM New York time.

• The Nasdaq 100 increased by 0.8%.

• The Dow Jones Industrial Average gained 1.2%.

• The MSCI World Index went up by 0.8%.

Currency Shifts

• The Bloomberg Dollar Spot Index dropped by 0.5%.

• The euro gained 0.6%, reaching $1.0428.

• The British pound rose by 0.6%, valued at $1.2575.

• The Japanese yen increased by 0.7%, sitting at 156.32 per dollar.

Cryptocurrency Trends

• Bitcoin experienced a decline of 2%, dropping to $95,420.2.

• Ether fell by 0.7% to $3,393.53.

Bond Yields

• The yield on 10-year Treasuries fell by four basis points to 4.53%.

• Germany’s 10-year yield decreased by two basis points to 2.29%.

• The UK’s 10-year yield went down by seven basis points to 4.51%.

Commodity Prices

• West Texas Intermediate crude rose by 0.2% to $69.51 a barrel.

• Spot gold gained 1.2%, reaching $2,623.86 an ounce.

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