(Bloomberg) — US equities gave back gains while the dollar advanced after Federal Reserve officials threw cold water on optimism for earlier and deeper interest rate cuts next year.
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The S&P 500 and Dow Jones Industrial Average benchmarks edged lower while the Nasdaq 100 clung to a 0.2% advance. US Treasuries wobbled after New York Fed President John Williams told CNBC it was “premature” to be thinking about a March rate cut on Friday.
“We view his comments as an effort to guide to a slower slope of normalization over several years as well as a challenge to the strong market bets on March for the first cut,” Krishna Guha, vice chairman at Evercore ISI, said. Guha views the first rate cut as more likely to come in May or June.
Williams’ Atlanta counterpart, Raphael Bostic told Reuters he was only penciling in two quarter-percentage-point rate cuts in the latter half of 2024.
While US stock benchmarks lost momentum on Friday, they remained on track for a seventh week of consecutive gains after the Fed ignited a speculative frenzy on Wednesday when it affirmed it’s ready to pivot to rate cuts.
“The S&P 500 has rallied more than 10% in less than two months so some digestion of the rally is needed,” Tom Essaye, the founder of The Sevens Report newsletter, wrote. That “likely will come in the near term, especially if Fed officials rhetorically push back on the market’s enthusiasm in the next week or two.”
The dollar advanced snapping a three-day slide. The yield on the 10-year bond — the benchmark for everything from mortgages to corporate debt — broke below 4% for the first time since August. The rate on the two-year hit 4.45%.
“Bond yields have been markedly volatile this year as market participants try to determine what the new normal for interest rates will be,” Carol Schleif, chief investment officer of BMO Family Office wrote. “We suspect the longer term new normal for the 10-year Treasury yield to range between 4% and 4.5%.”
As the week draws to a close, traders also have to contend with the year’s largest quarterly options and futures expiry and its potential to spark volatility. A staggering $5.4 trillion of contracts tied to stocks and indexes go off the board today, according to an estimate from Rocky Fishman, founder of derivatives analytical firm Asym 500.
Read more: A $5 Trillion Option Expiry Looms as S&P 500 Eyes All-Time High
Even with Williams squelching some of the market’s ebullience, the Fed’s tone this week was more dovish than that from European peers. European Central Bank Governing Council member Madis Muller said Friday that markets are getting ahead of themselves in betting that the ECB will start cutting interest rates in the first half of next year. On Thursday, ECB President Christine Lagarde said the bank had not discussed rate cuts at all.
“The contrast between the resilient US economy adopting a dovish stance and faltering European economies holding on to a hawkish position gives the impression that something is amiss,” Ipek Ozkardeskaya, a senior analyst at Swissquote, wrote in a note to clients.
Some of the main moves in markets:
Stocks
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The S&P 500 fell 0.3% as of 2:01 p.m. New York time
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The Nasdaq 100 rose 0.1%
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The Dow Jones Industrial Average fell 0.2%
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The MSCI World index fell 0.3%
Currencies
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The Bloomberg Dollar Spot Index rose 0.4%
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The euro fell 0.9% to $1.0893
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The British pound fell 0.8% to $1.2671
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The Japanese yen fell 0.2% to 142.24 per dollar
Cryptocurrencies
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Bitcoin fell 2.1% to $42,092.5
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Ether fell 2.4% to $2,244.15
Bonds
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The yield on 10-year Treasuries was little changed at 3.93%
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Germany’s 10-year yield declined 10 basis points to 2.02%
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Britain’s 10-year yield declined 10 basis points to 3.69%
Commodities
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West Texas Intermediate crude was little changed
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Spot gold fell 0.8% to $2,019.07 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Cecile Gutscher, Carly Wanna, Jan-Patrick Barnert, Kwaku Gyasi and Naomi Tajitsu.
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