S&P 500’s second consecutive report of strong U.S. retail sales weakens, market interest rate cut expectations

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Written By Rahul Chandak

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The  S&P’s four major U.S. stock indexes closed lower on Wednesday (17th). As the U.S. released strong retail sales data, which weakened market bets on the Federal Reserve (Fed)’s interest rate cut in March , U.S. bond yields rose and U.S. stocks fell further.

The Dow Jones Industrial Average closed down 94.45 points, or 0.25%, to 37,266.67 points on the 17th; the S&P 500 Index fell 26.77 points, or 0.56%, to close at 4,739.21 points; the Nasdaq Index fell 88.73 points, or 0.59%, to 14,855.62 point.

The Philadelphia Semiconductor Index fell 0.88% to 4,069.94 points; the small-cap benchmark Russell 2000 Index fell 0.7% to close at its lowest in more than a month. Wall Street’s fear gauge, the VIX, rose to 15.40 points, hitting its highest level since November last year.

Amazon, Nvidia and Google parent Alphabet fell between 0.5% and 1%, dragging down the S&P 500 index, while the U.S. 10-year Treasury yield rose to more than 4.1%, hitting its highest level so far this year.

Electric car maker Tesla fell 2% after it lowered the price of its Model Y in Germany, the latest price cut after lowering the prices of some models in China a week ago.

The rate-sensitive S&P 500 real estate sector fell 1.9%.

U.S. retail sales increased 0.6% monthly in December, exceeding market expectations, reinforcing the view that the Fed may not cut interest rates as quickly as previously expected this year.

Traders expect the probability that the Fed will raise interest rates by 1 percentage point in March has dropped to 55%, from about 60% before the data was released.

In recent weeks, U.S. stocks have given back some of their gains in the final two months of 2023.

Tom Martin, senior portfolio manager at Globalt Investments, said: “People’s stance is cooling from ‘overall bullish’ to ‘there’s still a lot of uncertainty.'” That’s because Fed officials have recently downplayed expectations for a quick move to cut interest rates, he said. , and economic data is mixed.

Interactive Brokers analyst Jose Torres said that as the earnings season continues to move forward, investors will have to consider the outlook for interest rates while considering financial results.

“Strong pricing power and profitability may lead to continued inflationary pressures, which will gradually Delaying interest rate cuts”, “On the other hand, weak profit trends may pave the way for easing monetary policy.”

Morgan Stanley fell 1.8% after analysts lowered their rating and target price on Morgan Stanley after the bank released its last quarter earnings report. Bank of America and Citigroup both fell about 1%.

Charles Schwab fell 1.3% after reporting a 47% plunge in fourth-quarter profit.

Ford Motor Co fell 1.7% after UBS cut its rating on the stock to neutral from buy.

Boeing rose 1.3% after the U.S. Federal Aviation Administration (FAA) said inspections of the first batch of 737 Max 9 aircraft were completed.

Market Volatility Amid Inflation Concerns:

U.S. stocks witnessed volatility on Thursday, ending the day essentially flat. Concerns about accelerating inflation raised doubts about the Federal Reserve’s ability to cut interest rates as extensively as previously anticipated.

Mixed Performance of Major Indexes:

The Dow Jones Industrial Average rose 15.29 points, or 0.04%, closing at 37,711.02 points, reflecting a marginal increase.
– The S&P 500 Index fell 3.21 points, or 0.07%, concluding at 4,780.24 points.
– The Nasdaq Index saw a modest rise of only 0.53 points, reaching 14,970.19 points.

The trading day proved choppy, with stocks initially opening higher. The S&P 500 briefly surpassed its January 2022 record before relinquishing its early gains.

Despite ending 2023 on a strong note, stocks faced challenges in gaining momentum, with the S&P 500 showing a mere 0.21% increase year-to-date. Mixed economic data and statements from Fed officials led investors to adjust their expectations regarding the timing and extent of interest rate cuts.

Inflation Data and Economic Indicators:

The December Consumer Price Index (CPI) data, released by the U.S. Department of Labor, surpassed market expectations, driven by increased housing and healthcare costs. Unexpectedly, the number of individuals filing for unemployment benefits fell to 202,000 last week.

Federal Reserve’s Response to Inflation:

Speeches from Fed officials influenced market sentiment. New York Fed President Williams deemed it premature to call for an interest rate cut, emphasizing the Fed’s progress toward the 2% inflation target.

Cleveland Fed President Loretta Mester suggested that a March rate cut might be premature, considering the latest CPI data. Richmond Fed President Barkin expressed the need for evidence before committing to a rate cut, highlighting the concentration of inflation in commodities.

Treasury Market Dynamics:

Falling U.S. Treasury yields helped offset stock losses, particularly after a successful auction of $21 billion in 30-year Treasury notes, alleviating concerns about market supply and demand dynamics.

Corporate Leadership Shift:

Microsoft briefly surpassed Apple, becoming the world’s most valuable company. Apple’s shares declined nearly 4% year-to-date due to apprehensions about decreasing demand. Microsoft saw a 0.49% increase, while Apple experienced a 0.32% decline.

Sectoral Performance:

Almost all 11 major sectors of the S&P 500 index incurred losses.
Energy and technology stocks were exceptions, recording increases of 0.16% and 0.44%, respectively.

Cryptocurrency-Related Stocks and ETF Approval

Cryptocurrency-related stocks experienced significant declines, with Coinbase falling 6.7%, Bitfarmers falling 13.33%, and Riot Platform falling 15.82%. Notably, U.S. securities regulators approved the first U.S.-listed ETFs tracking spot Bitcoin.

Banking Sector Challenges:

Citigroup faced a 1.77% decline after revealing charges and provisions totaling approximately $3.8 billion, impacting its fourth-quarter profit.

The group is set to report earnings on Friday. Other major banks, including JPMorgan Chase, Bank of America, and Wells Fargo, also saw declines, with earnings reports scheduled for Friday. 

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