Stocks surged at the open but were unable to sustain their gains a day after the Federal Reserve cut interest rates with hawkish intent, though the Dow Jones Industrial Average closed in the green for the first time since December 4.
And while the benchmark 10-year Treasury yield is still rising, some of that is tied to an economy that continues to exceed estimates.
“I don’t understand why anybody was surprised by the Fed’s rate projections, which reflect the same reaction function apparent in prior projections,” writes Guy Berger in a post on the social media site BlueSky. “Inflation finished the year a little higher than expected three months ago, unemployment a little lower, ergo slightly fewer rate cuts than previously expected.”
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Berger, the director of economic research at the Burning Glass Institute, notes that if the next three month’s worth of inflation and/or unemployment data “surprise in the opposite direction, we’ll see more rate cuts in the projection.” This dependence on incoming data raises the possibility of no rate cuts at all.
Less charitable in his reflections on recent price action is Josh Brown, the CEO of Ritholtz Wealth Management: “Yesterday was the sixth worst day for stocks in December going back to 1950 and the second worst day overall this year,” Brown observes. “I want to remind you that it doesn’t matter what you bought or sold. The important thing is you panicked.”
The Dow Jones Industrial Average was up 0.04% to 42,342, enough to end its longest losing streak since 1974. The S&P 500 and the Nasdaq Composite each shed 0.1% to 5,867 and 19,372, respectively.
GDP surprises to the upside
In addition to explaining the Fed’s updated Summary of Economic Projections and the downward revision in the number of forecast interest rate cuts next year, Fed Chair Jerome Powell said during his post-FOMC meeting press conference that the U.S. economy remains strong.
The Bureau of Economic Analysis confirmed Powell’s case with updated data showing gross domestic product expanded at a faster rate during the third quarter than initially forecast. The BEA reported before the opening bell that Q3 GDP growth was 3.1% vs an initial forecast of 2.8%.
“Upward revisions were focused in consumer spending and exports, reflecting revised source data,” explains Barclays Senior U.S. Economist Jonathan Millar. “The estimates point to robust domestic demand conditions.” Millar adds that updated BEA data “confirm that, even before the Fed entered its cutting cycle, the U.S. had enjoyed another quarter of above-trend growth.”
The Fed’s updated SEP includes a revised forecast for its preferred measure of inflation, the Personal Consumption Expenditure Price Index (PCE). The Fed says headline PCE will be 2.5%, up from 2.1% in September. Core PCE will be 2.5%, up from 2.2%.
The BEA will report PCE data for November tomorrow at 8:30 am Eastern. A consensus forecast compiled by FactSet expects to see that PCE was up 0.2% month over month and 2.5% year over year and that core PCE, which excludes volatile food and energy prices, was up 0.2% monthly and 2.9% annually.
Yields on the move
As John Authers of Bloomberg points out in his December 19 Daily Note, citing the work of his colleague Ye Xie, “The 10-year yield hasn’t leapt so much in response to a Fed announcement since the notorious Taper Tantrum of 2013. Quite a response to a cut.”
The 10-year U.S. Treasury yield was still climbing on Thursday following the release of the BEA’s second revision to Q3 GDP, rising as high as 4.594% from 4.498% on Wednesday and settling at 4.572% as of 4 pm.
“The direction of travel for rates is unmistakably upward,” observes Authers, who concludes that the Fed requires “very clear evidence” it has overestimated economic strength before it cuts again.
“The market is still digesting the hawkish message,” says Steve Englander, the head of foreign exchange at Standard Chartered. “The USD exceptionalism case is likely to remain intact until the data show that it is overdone.”
Micron on the move
Micron Technology (MU) stock was down as much as 18.4% and closed off 16.2% at $87.09 after the memory chip maker beat the bottom-line estimate for its fiscal first quarter but came up short with its guidance for the second quarter.
Management said fiscal 2025 Q2 earnings will be approximately $1.53 per share on revenue of about $7.9 billion. Analysts wanted to see $1.91 per share on revenue of $8.98 billion. CEO Sanjay Mehrotra, acknowledging near-term weakness in consumer markets, said Micron expects growth in the second half of its fiscal year.
“Micron delivered results at the high end of prior fiscal Q1 guidance despite incremental end market headwinds, helped by favorable mix shifts,” writes Wedbush analyst Matt Bryson in a note to clients. “Industry headwinds, however, are expected to weigh significantly more on fiscal Q2 results.”
Bryson reiterated his Outperform (Buy) rating but lowered his 12-month price target for the semiconductor stock to $125 from $140. This gives shares implied upside of 43.5% from current levels.
