U.S. and Canadian stocks closed with modest losses on Wednesday, well off their intraday highs, after the Federal Reserve cut interest rates by 50 basis points, the high side of estimates for its first cut in more than four years.
Trading was choppy. Prior to the Fed announcement, the S&P 500 oscillated between modest gains and losses. The benchmark U.S. index rose as much as 1% after the announcement before paring gains and finally closing lower. The Dow, S&P 500 and S&P/TSX Composite Index hit intraday highs before weakening.
Citing a “greater confidence” that inflation was moving toward the central bank’s 2% target, the Fed cut rates by half a percentage point, as it now focuses on keeping the labor market healthy.
“The Fed ended the pause with a bang. It’s a strong signal that they cut by 50 basis points and expect another 50 basis points of cuts this year,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin. “The Fed is projecting that by front loading the cuts they can stick the landing with the unemployment rate at 4.4% and inflation dropping to target quickly.”
Market expectations for the size of the rate cut had been volatile in recent days, pricing in about a 65% chance for a 25 basis point cut last week to a 57% chance for the larger 50 basis point cut earlier on Wednesday, according to CME’s FedWatch Tool.
The Dow Jones Industrial Average fell 103.08 points, or 0.25%, to 41,503.10, the S&P 500 lost 16.32 points, or 0.29%, to 5,618.26 and the Nasdaq Composite lost 54.76 points, or 0.31%, to 17,573.30.
The S&P/TSX composite index ended down 85.10 points, or 0.4%, at 23,592.60. On Monday, the index posted a record closing high at 23,702.07.
Markets are now fully pricing in a cut of at least 25 basis points at the Fed’s November meeting, with a roughly 35% chance for another 50 basis point cut.
“It’s amazing to me how even when markets get what they seemingly want, they immediately want more,” said Steve Sosnick, chief market strategist at Interactive Brokers in Greenwich, Connecticut.
“It’s important to note that stocks are not rocketing ahead (at least not yet) after getting what they wanted. After seven straight up days, a lot of good news was priced in.”
Borrowing costs had been parked at their highest levels in over two decades since July 2023, when the central bank last hiked interest rates by 25 basis points to between 5.25% and 5.50% to combat inflation.
After the rate cut announcement, Fed Chair Jerome Powell said the central bank’s forecast for the path of interest rates did not imply the need for urgent action.
U.S. small cap stocks, seen as more likely to benefit from a lower interest rate environment, moved higher with the Russell 2000 outperforming its large cap brethren, as it shot up as much as 2.44% before closing up 0.04% on the day. Regional banks, some of which had been stressed by higher interest rates, also gained ground, with the KBW Regional bank index jumping as much as 3.53% before closing up 0.46%.
Markets have rallied this year, with all three major U.S. indexes setting record highs on prospects of lower interest rates as inflation moderated and the jobs market showed gradual signs of cooling.
In Toronto trading Wednesday, the energy sector fell 0.5% as the price of oil settled 0.4% lower at US$70.91 a barrel.
The price of gold also fell. That weighed on metal mining shares, with the materials group ending 0.8% lower. Industrials lost 0.7% and heavily weighted financials were down 0.3%.
In Canadian corporate news, Rogers Communications reached a deal to buy BCE Inc’s stake in Maple Leaf Sports & Entertainment (MLSE). Shares of Rogers fell 2.7%, while BCE’s shares were up 3.3%.
Late in the session, U.S. Treasury yields rose in choppy trading. The benchmark 10-year yield rose 7.1 bps to 3.713% after earlier hitting its highest in more than a week. The yield posted its best daily gain since Aug. 21. Canadian bond yields were also up modestly by late afternoon Wednesday.
Declining issues outnumbered advancers by a 1.14-to-1 ratio on the NYSE and by a 1.36-to-1 ratio on the Nasdaq. The S&P 500 posted 43 new 52-week highs and no new lows while the Nasdaq Composite recorded 165 new highs and 69 new lows. Volume on U.S. exchanges was 11.63 billion shares, compared with the 10.82 billion average for the full session over the last 20 trading days.
Reuters, Globe staff