US Stocks Drop Amid Rate Cut Setback

Some US stocks dropped on Tuesday, January 16, as traders digested comments from Fed's Governor Christopher Waller suggesting less urgency for interest rate cuts, corporate earnings, and mixed economic data. The Dow Jones Industrial Average (USD 30) fell 0.62%, the S&P 500 (US 500) ended the session 0.37% lower, and the tech-heavy  Nasdaq (US-TECH 100) lost 0.19%

Following Waller's comments, traders' expectations of a  March interest rate cut dropped to 60% from 73% prior to his remarks. His comments have not been as hawkish to prompt such a reaction; however, pushing back expectations was seen propelling the US dollar higher.

Fed's Waller Pushes Back Rate Cut Expectations 

On Tuesday, Fed governor Christopher Waller signalled "no reason" for the Fed to go ahead and cut interest rates as soon or as aggressively as markets expected. Most investors were pricing in a March rate cut, with the Fed governor's comments indicating that rate cuts may come later and also be slower.      Some analysts believe the Fed will likely cut rates only thrice this year unless the economic situation deteriorates. Conversely, some market participants see as many as six.

Despite the perceived hawkishness, Waller said the Fed has made progress in curbing high inflation without harming the economy. However, he expressed uncertainty on whether the slowdown in CPI readings continues. The governor even confirmed the Fed would cut interest rates in 2024 and displayed confidence that it was en route to bringing inflation back to the 2% target. 

However, he gave weight to incoming data before committing to rate cuts. In particular, he said he needs to confirm a restraint in consumption and hiring and persistently low short-term inflation to justify rate cuts. On the other hand, Waller implied the Fed should start reducing its balance sheet to around 10-11% of the US GDP this year.

Single Stock Drops Weigh on US Indices

Based on recent earnings reports, bank stocks have not started 2024 positively. High interest rates have impacted profit outlook, playing a prominent part in the sector's drop. If the Fed cuts rates later this year as broadly expected, banks could experience further pressure as interest income falls.

Goldman Sachs (GS) and Morgan Stanley (MS) reported mixed results on Tuesday. Notably, the latter's profits fell 32% in Q4 2023 compared to Q4 2022. Similarly to other banks, MS had to acknowledge a special assessment by the Federal Deposit Insurance Copt (FDIC), resulting in a $286 million charge. Its stock price was seen over 3% lower post-release in early trading.

In a separate sector, the shares of Boeing (BA), Apple (AAPL), and PayPal (PYPL) slid on earnings concerns. Boeing and Paypal fell 8% and 3.5%, respectively, following downgrades by Wells Fargo (WFC) and Mizuho (8411.TY), while Apple dropped 1.8% after it decided to cut prices on China-sold products. Spirit Airlines crashed  47% lower after a federal judge blocked a merger between them and JetBlue (JBLU).

Notably, last Friday's full-year and Q4 earnings didn't provide the kick markets expected. Although JPMorgan (JPM) reported a record annual net income of nearly $50 billion, Citigroup (C)'s plans to reduce headcount and costs were taken with a pinch of salt. Delta Air Lines (DAL) fell short of expectations, too, weighing on the airline sector.

New York Manufacturing Disappoints

Adding to the narrative, the NY Fed's general business conditions index plunged to -43.7 in  January, contracting for the 14th month. New orders and shipments sank, with the former falling to the weakest level since April 2020.  

The declines in manufacturing activity and new orders point to a possible beginning of a recession, though more data is needed to confirm this. In line to support the Fed's Waller inflation rhetoric, employment and hours worked dropped.

Looking For the Next Market Movers

With major banks' earnings pretty much out of the way this week, traders may want to assess how consumer spending performed on Wednesday with the release of US retail sales. 

Interestingly, a bill to avert a government shutdown passed the Senate on Tuesday as lawmakers pushed through before a deadline set on Friday. The bill aims to give both the Senate and House of Representatives more time to approve a $1.59 trillion spending measure. The Senate voted in favour of 68-13 to advance the bill, extending current levels with two new expiration dates. 

Congress agreed to $886.3 billion for defence spending and $772.7 billion for domestic discretionary but still needs time to divide that among the 12 individual bills. While the threat of a government shutdown can cause market volatility, the actual shutdowns themselves have not impacted the stock market materially in the past.

Over the next few weeks, earnings reports from companies may become a key focus, including results from Tesla (TSLA), Microsoft (MSFT), Apple, and Meta (META). (Source: Forbes)

Conclusion

Markets came under pressure as some Fed officials pushed back market expectations for interest rate cuts, major corporations weighing in in some way, and consecutive contracting business activity in the US. 

With a light events calendar coming up for the rest of the week, traders and investors may keep an eye on consumer data and developments around the US government shutdown.