The S&P 500 index closed down 0.13% on Tuesday, while the Dow Jones Industrials Index saw a decline of 0.27%. The Nasdaq 100 Index also ended the day down by 0.08%. Meanwhile, September e-mini S&P futures and September e-mini Nasdaq futures experienced slight declines of 0.11% and 0.04%, respectively.
The stock indices retreated from earlier gains, resulting in a modest loss due to long liquidation and position adjustments ahead of the FOMC meeting results on Wednesday. Market expectations lean toward a 25 basis point interest rate cut. Yet, the focus will likely be on the Fed’s new quarterly rate forecast, or DOT plot, to gauge if what policymakers anticipate aligns with market projections, which suggest a total of 70 basis points of rate cuts by year-end.
Initially, the S&P 500 and Nasdaq 100 achieved fresh record highs on Tuesday. Encouraging signs of ongoing U.S. consumer spending have lifted both the economy and the stock market, particularly after retail sales climbed more than anticipated in August. Strength in technology stocks bolstered the broader market, with semiconductor stocks performing well, although healthcare stocks faced setbacks after Wells Fargo downgraded the sector from neutral to undesirable.
Retail sales in the U.S. rose by 0.6% month-over-month in August, outpacing expectations of a 0.2% increase. Excluding automobiles, retail sales increased by 0.7%, also better than the anticipated 0.4%.
The U.S. Import Price Index, excluding petroleum, saw a modest rise of 0.2% month-over-month, just above predictions.
Interestingly, U.S. manufacturing production increased, contradicting forecasts of a 0.2% month-over-month decline.
The September NAHB Housing Market Index in the U.S. remained unchanged, continuing its trend at the lowest level seen since 2012.
Major U.S. stock benchmarks, including the S&P 500, Dow Jones Industrials, and Nasdaq 100, are continuing to experience record highs driven by expectations of interest rate cuts. Weak labor market indicators and moderate inflation data have solidified predictions, forecasting at least a 25 basis point cut from the Fed at the upcoming meeting, with a total of 70 basis points cut expected by year-end.
This week, the market’s attention will remain on new trade and tariff developments. The FOMC meeting is anticipated to lower its federal funding target from 4.25%-4.50% to 4.00%-4.25%. Following the meeting, Fed Chair Powell will likely provide commentary. Additionally, initial unemployment claims are projected to decrease from 263,000 to 240,000.
As the TUE/WED FOMC meeting approaches, there’s a 100% probability priced in for a 25 basis point rate decrease and a 5% chance for a 50 basis point cut. After this expected reduction, the market anticipates an 84% chance for a further reduction at the next FOMC meeting set for October 28-29. Overall, the market is estimating a reduction of the federal funding rates to 3.65% by year-end, down from the current 4.33%.
Internationally, stock markets showed mixed results on Tuesday. The Euro Stoxx 50 dropped by 1.25%, while China’s Shanghai Composite saw a slight gain of 0.04%. Japan’s Nikkei 225 reached new highs, closing up by 0.30%.
The December 10-year T-note ended Tuesday up by 2.5 ticks, with its yield decreasing slightly to 4.026%. T-notes garnered strong demand following a bond auction that showed a bid rate well above average. After initial losses due to positive retail sales and manufacturing reports, T-notes climbed as the market anticipates at least a 25 basis point rate cut by the Fed.
Concerns linger about the Fed’s independence impacting T-note prices amid speculation regarding Stephen Milan’s dual role as both a Fed governor and economic advisor to the White House.
European government bond yields also rose on Tuesday, with Germany’s 10-year yield increasing slightly to 2.693%. The yield on British gilts for a decade grew by 4.639%.
In the eurozone, industrial production saw a 0.3% month-over-month rise in July, falling short of expectations. However, June’s figures were positively revised.
Labor costs in the eurozone increased from 3.4% year-over-year in Q1 to 3.6% in Q2, signaling rising expenses. Meanwhile, the September Zew survey from Germany unexpectedly showed a rise in economic growth expectations.
Simkus, an ECB Management Council member, remarked on the current inflation target in the eurozone, indicating that potential interest rate cuts from the ECB could be imminent.
In U.S. stock movements, healthcare stocks dropped on Tuesday following Wells Fargo’s downgrade. Notable losers included UnitedHealth Group, Centene, and Welltower, all closing down by more than 2%. Meanwhile, some companies faced significant declines: Dave & Buster’s Entertainment saw more than a 17% drop due to disappointing earnings, while Rocket Lab fell over 12% amidst announcements of new stock offerings.
Warner Bros Discovery declined over 6% after being downgraded by TD Cowen, while Everest Group and Emerson Electric also experienced losses following negative forecasts.
On the other hand, the semiconductor sector lifted technology stocks, with substantial gains from major players like Intel and Microchip Technology. Energy stocks rose as WTI crude prices hit a 1.5-week high, benefiting companies such as APA Corp and Occidental Petroleum.
Webtoon Entertainment surged over 38% after news of Walt Disney’s interest in acquiring a stake. Bloom Energy and Ferguson Enterprises also reported significant gains thanks to optimistic forecasts and increased revenue reported.
In the latest earnings update, Cracker Barrel Old Country Store and General Mills Inc are set to report soon.
