(Bloomberg) — Wall Street turned its attention to stocks and bonds this week after Jerome Powell and the Federal Reserve confirmed it was ready to cut interest rates.
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The Federal Reserve left its key interest rate unchanged as policymakers refrained from further rate hikes and instead announced three rate cuts next year. The Nasdaq 100 closed at an all-time high – it last traded at a record price two years ago. Both the S&P 500 and the tech-heavy index snapped a seven-week winning streak following the Fed's reversal.
Even opposition from New York Fed President John Williams, who told CNBC on Friday that it was “premature” to consider a rate cut in March, failed to quell the rally.
The S&P 500 ended the day flat, posting a weekly gain of 2.5%. The benchmark Dow Jones Industrial Average rose 0.2%, hitting its third straight record high. US Treasuries rose along the curve, although trading was mixed on Friday.
“We view his comments as an attempt to lead to a slower increase in normalization over several years, as well as a challenge to the strong market bets in March for the first cut,” said Krishna Guha, vice chairman of Evercore ISI. Guha expects the first rate cut to be more likely in May or June.
Williams' Atlanta counterpart, Raphael Bostic, told Reuters that he plans to cut only two interest rate cuts of a quarter of a percentage point in the second half of 2024. Swap traders are eyeing up to six rate cuts next year.
“The S&P 500 is up more than 10% in less than two months, so the rally takes some digestion,” wrote Tom Essaye, founder of The Sevens Report newsletter. This “is likely to happen in the near future, particularly if Fed officials rhetorically curb market enthusiasm over the next week or two.”
The story goes on
The dollar rose and experienced a three-day decline. The yield on the 10-year note – the benchmark for everything from mortgages to corporate bonds – fell below 4% this week for the first time since August.
“Bond yields have been extremely volatile this year as market participants try to figure out what the new normal for interest rates will be,” wrote Carol Schleif, chief investment officer at BMO Family Office. “We expect the longer-term new normal for the 10-year Treasury yield to be between 4% and 4.5%.”
Traders also had to contend with the largest quarterly options and futures expiration of the year and its potential to trigger volatility. According to an estimate by Rocky Fishman, founder of derivatives analysis firm Asym 500, a staggering $5.4 trillion in contracts related to stocks and indices have left the table today.
Read more: $5 trillion options expiry looms as S&P 500 hits all-time high
Although Williams tempered some of the market's exuberance, the Fed's tone this week was more dovish than that of its European counterparts. Madis Muller, a member of the ECB's Governing Council, said on Friday that markets are betting on themselves 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 interest rate cuts at all.
“The contrast between the robust U.S. economy, which is adopting a dovish stance, and the shaky European economies, which are sticking to a hawkish stance, creates the impression that something is wrong,” wrote Ipek Ozkardeskaya, senior analyst at Swissquote, in a Notice to customers.
Some of the key moves in the markets:
Shares
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The S&P 500 was little changed at 4 p.m. New York time
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The Nasdaq 100 rose 0.5%
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The Dow Jones Industrial Average rose 0.2%
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The MSCI World Index has hardly changed
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 0.7% to $1.2674
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The Japanese yen fell 0.2% to 142.24 per dollar
Cryptocurrencies
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Bitcoin fell 1.7% to $42,242.83
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Ether fell 2.1% to $2,251.65
Tie up
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The yield on 10-year government bonds remained little changed at 3.91%
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The 10-year German government bond yield fell 10 basis points to 2.02%
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The 10-year UK government bond yield fell 10 basis points to 3.69%
raw materials
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West Texas Intermediate crude rose 0.2% to $71.69 a barrel
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Spot gold fell 0.9% to $2,018.37 an ounce
This story was produced with support from Bloomberg Automation.
–With assistance from Cecile Gutscher, Carly Wanna, Jan-Patrick Barnert, Kwaku Gyasi and Naomi Tajitsu.
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