Stocks Slump as Fed Signals No Rush to Cut Interest Rates

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday closed down -1.61%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.82%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.94%.

Stocks on Wednesday retreated, with the S&P 500 dropping to a 1-week low and the Nasdaq 100 falling to a 1-1/2 week low.  Stocks opened lower Wednesday on a slump in technology stocks after earnings results from Alphabet, Advanced Micro Devices, and Microsoft failed to live up to lofty expectations.  Stock index futures recovered from their worst levels mid-morning as bond yields fell after the Jan ADP report showed companies added fewer jobs than expected and the Q4 employment cost index rose less than expected.

However, stock losses accelerated Wednesday afternoon after Fed Chair Powell threw cold water on expectations for a Fed rate cut in March when he said the Fed intends to move carefully in dialing back interest rates and he "doesn't think it’s likely" the Fed will cut interest rates in March.

As expected, the FOMC kept the fed funds target range at 5.25%-5.50% and said risks to achieving its employment and inflation goals "are moving into better balance."  The FOMC also removed the reference to potential additional policy firming but pushed back on any immediate easing of monetary policy when it said it "does not appear it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%." 

The markets are discounting the chances for a -25 bp rate cut at 37% at the March 19-20 FOMC meeting and have fully discounted (129%) that same -25 bp rate cut for the following meeting on April 30-May 1.

The U.S. Jan ADP employment change rose +107,000, weaker than expectations of +150,000.

The U.S. Q4 employment cost index rose +0.9% q/q, weaker than expectations of +1.0% q/q and the smallest pace of increase in 2-1/2 years.

The U.S. Jan MNI Chicago PMI unexpectedly fell -1.2 to 46.0, weaker than expectations of an increase to 48.0.

The Treasury announced that it will sell $121 billion of T-notes and T-bonds in the February quarterly refunding next week, right on expectations.  The Treasury said it does not anticipate the need to boost auction sizes "for at least the next several quarters." 

U.S. and European government bond yields on Wednesday moved lower.  The 10-year T-note yield fell to a 2-1/2 week low of 3.920% and finished down -4.0 bp at 3.992%.  The 10-year German bund yield fell to a 3-week low of 2.153% and finished down -10.2 bp at 2.166%.  The 10-year UK gilt yield fell to a 2-week low of 3.784% and finished down -10.6 bp at 3.794%.   

Overseas stock markets on Wednesday settled mixed.  The Euro Stoxx 50 closed down -0.31%. China’s Shanghai Composite Index closed down -1.48%.  Japan’s Nikkei Stock Index closed up +0.61%.

Today’s stock movers…

MarketAxcess Holdings (MKTX) closed down more than -17% to lead losers in the S&P 500 after KBW said the company said in its earnings call that high-yield average daily value is tracking down 30% from 2023 levels. 

Rockwell Automation (ROK) closed down more than -17% after reporting a Q1 adjusted EPS of $2.04, well below the consensus of $2.66, and cut its full-year EPS forecast to $11.24-$12.74 from a prior view of $11.49-$12.99. 

Teradyne (TER) closed down more than -7% after reporting Q4 net revenue of $670.6 million, below the consensus of $676.1 million, and forecasting Q1 revenue of $540 million-$590 million, weaker than the consensus of $624.3 million. 

Alphabet (GOOGL) closed down more than -7% to lead losers in the Nasdaq 100 after reporting Q4 Google ad revenue of $65.52 billion, below the consensus of $65.80 billion. 

Boston Properties (BXP) closed down more than 5% after forecasting the 2024 occupancy rate for its properties would fall to 87.2% from 88.4%. 

Thermo Fisher Scientific (TMO) closed down more than -4% after forecasting 2024 revenue of $42.10 billion-$43.30 billion, the midpoint below the consensus of $42.96 billion.

Roper Technologies (ROP) closed down more than -4% after forecasting full-year adjusted EPS from continuing operations of $17,85 to $18.15, weaker than the consensus of $18.37. 

Advanced Micro Devices (AMD) closed down more than -2% after forecasting Q1 revenue of $5.10 billion-$5.70 billion, weaker than the consensus of $5.77 billion. 

Paramount Global (PARA) closed up more than +6% to lead gainers in the S&P 500 after Bloomberg reported that Byron Allen had made a $14.3 billion offer to buy all of the company's outstanding shares. 

Medical device stocks rallied Wednesday on strong earnings results from Stryker and Boston Scientific. As a result, Edward Lifesciences (EW) closed up more than +6%, and Stryker (SYK) closed up more than +5%.  Also, Boston Scientific (BSX) closed up +3%, and Zimmer Biomet Holdings (ZBH) closed up more than +2%.

Cencora (COR) closed up more than +5% after reporting Q1 adjusted EPS of $3.28, well above the consensus of $2.90, and raised its full-year adjusted EPS estimate to $13.25-$13.50 from a previous estimate of $12.70-$13.00.

Boeing (BA) closed up more than +5% to lead gainers in the Dow Jones Industrials after reporting Q4 adjusted free cash flow of $2.95 billion, well above the consensus of $2.09 billion. 

Fortive (FTV) closed up more than +4% after reporting Q4 adjusted EPS of 98 cents, better than the consensus of 94 cents, and forecasts 2024 adjusted EPS of $3.73-$3.85, stronger than the consensus of $3.66. 

Automatic Data Processing (ADP) closed up more than +3% to lead gainers in the Nasdaq 100 after reporting Q2 revenue of $4.70 billion, above the consensus of $4.66 billion.

Qualcomm (QCOM) closed up more than +1% after reporting Q1 adjusted revenue of $9.92 billion, stronger than the consensus of $9.54 billion.

Cardinal Health (CAH) closed up more than +1% after agreeing to buy Specialty Networks for $1.2 billion, a move analysts see expanding the company’s business.

Across the markets…

March 10-year T-notes (ZNH24) on Wednesday closed up +22.5 ticks, and the 10-year T-note yield fell by -4.0 bp to 3.992%. Mar T-notes on Wednesday rose to a 2-week high, and the 10-year T-note yield fell to a 2-1/2 week low of 3.920%. T-notes opened higher Wednesday on positive carryover from a rally in 10-year German bunds to a 3-week high after German Jan CPI rose less than expected.  T-notes extended their gains on Wednesday’s Fed-friendly reports on the Jan ADP employment change that rose less than expected and the Q4 employment cost index, which posted its smallest increase in 2-1/2 years.  Another supportive factor for T-notes was a decline in inflation expectations after the 10-year breakeven rate fell to a 2-1/2 week low of 2.301%.

However, T-notes fell back from their best levels after the FOMC kept monetary policy unchanged, and the post-FOMC statement pushed back on any immediate easing of monetary policy. T-notes fell back further from their highs after Fed Chair Powell squashed speculation about imminent Fed rate cuts when he said he "doesn't think it’s likely" the Fed will cut interest rates in March.

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.