(Bloomberg) — US stocks declined as traders braced for the Federal Reserve’s widely anticipated rate decision and its forecast for next year.
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The S&P 500 and the Nasdaq 100 slid 0.4%. The Dow Jones Industrial Average posted its longest losing streak since 1978. The yield on 10-year Treasuries was little changed at 4.40%. Bloomberg’s dollar gauge fluctuated for most of the session.
Earlier, data showed that US retail sales increased at a firm pace in November, highlighting consumer resilience. While the report didn’t seem to change expectations for a rate cut by the Fed this week, there is an understanding that the central bank will prepare the market for a pause early next year, said Ian Lyngen of BMO Capital Markets. Industrial production data also came in Tuesday, unexpectedly declining for a third month in November.
Traders are now turning to the Fed’s last rate decision of the year due Wednesday. A quarter-point cut is widely expected, but what happens in the following months is less clear. While the US economy is resilient, the prospect of inflationary import tariffs proposed by the incoming administration of Donald Trump may give Fed officials pause about the pace of further moves.
Bank of America Corp. sees the Fed lowering interest rates to the 3.75% level — or three more cuts from where they are, CEO Brian Moynihan said on Bloomberg Television.
“They need to bring it down a little bit, they just have to be more careful because the economy is stronger than we thought three months ago, six months ago but still has potential weaknesses” he said. “We haven’t even talked about what is going on outside the United States that could affect it — not tariffs but wars.”
On the other hand, Chris Larkin, managing director, trading and investing, E*Trade from Morgan Stanley, says more strong economic data like retail sales could bolster the case for the Fed to pause in January.
In either case, what happens to stocks and bonds will be determined by what the Fed says about cuts in 2025 instead of the central bank’s decision tomorrow, wrote Tom Essaye, president and founder of Sevens Report and a former Merrill Lynch trader.
Currencies and Central-Bank Bets
In Canada, inflation dropped below the central bank’s target for the second time in three months. The data is expected to give Bank of Canada officials confidence that their rapid rate cuts didn’t derail their efforts to keep price gains at the 2% target. However, persisting political discord in Canada pushed the loonie to a Covid-era low.
