US close: Stocks drop sharply on Fed rate-cut uncertainty

dl jerome powell federal reserve open market committee virtual press conference 3 november 2021 chair fomc fed jay pd — Fed chair Jerome PowellSharecast / public domain image

US stock markets suffered heavy losses on Wednesday on the back of poorly received results from tech heavyweights and comments from the Federal Reserve which said that interest-rate cuts are not yet imminent.

After trading more or less flat for most of the session, the Dow – which notched another record closing high on Tuesday – dropped 0.8% by the close with only four index constituents in positive territory. The S&P 500 sank 1.6% and the Nasdaq plunged 2.2%, with the latter weighed down by heavy falls from Microsoft and Alphabet.

The Fed said it was now closer to achieving its goals for both full employment and inflation stability, but policymakers were still not confident enough that inflation was shifting back down to the 2% target on a sustainable basis. Until they are, the Federal Open Market Committee would not cut rates, according to the policy statement released at 1400 ET.

Importantly however, the reference to the possible need for further rate hikes – which has been a mainstay of policy statements since the Fed first paused monetary tightening last June – was removed. Furthermore, during his press conference, Fed chair Jerome Powell said that everyone on the committee believed that rates would be cut in 2024, but the timing was yet to be determined.

Bonds gained on the news, with the 10-year US Treasury yield falling 11.5 basis points to 3.919%, but equity prices plunged further into the red.

"The FOMC didn’t fully embrace financial markets' view that rate cuts could come as early as March," said economist Ryan Sweet from Oxford Economics. "That said, if the Fed finds itself falling behind the curve, it has plenty of room to cut aggressively and this could be factoring into their communication. There was nothing in the post-meeting statement that warrants a change to our forecast for the first rate cut to occur in May."

In other macro news, the ADP Employment report showed that private sector employment in the US increased by 107,000 from December, versus expectations for a 145,000 jump. Meanwhile, December’s gain was revised down to 158,000 from 164,000.

The Department of Labor's Employment Cost Index increased by 0.9% during the fourth quarter (consensus: 1.0%). Covid distortions aside, that was the smallest increase since December 2019 and down from the 1.1% rise seen during the prior quarter.

The Chicago purchasing managers' index, which tracks business conditions across Illinois, Indiana and Michigan, dropped to 46.0 this month, from a revised 47.2 in December, missing the 48.0 forecast.

Microsoft and Alphabet disappoint

Microsoft, the second-largest company by market cap which crossed the $3trn mark last week, fell nearly 3% after underwhelming with its statement for its fiscal second quarter. The company delivered a record quarter, beating analysts' forecasts with both revenues and profits, driven by a 30% jump in sales for its Azure division, the market was firmly focusing on guidance for the third quarter. The tech giant pointed to revenues of $60-61bn, or $60.5bn at the mid-point, slightly under the current consensus estimate of $60.93bn.

Google owner Alphabet also overshot market estimates with its fiscal fourth quarter but shares dropped by over 7% with market chatter pointing to disappointing search revenues.

Apple, the largest company by market cap which reports earnings after the close of trading on Thursday, also fell 2%.

Shares in Paramount Global soared over 20% after it emerged Allen Media Group had submitted a multi-billion dollar bid for the US giant. In a statement sent to Reuters, the business – controlled by entrepreneur Bryon Allen – said it had submitted a $30bn debt and equity bid.

Troubled aerospace giant Boeing topped market expectations with fourth-quarter results, but declined to offer guidance for 2024 as it grappled with safety issues with its 737 MAX-9 narrowbody. Shares rose 5% after the company reported a quarterly loss per share of 47 cents, much better than the expected 78 cents loss. Revenue also exceeded estimates, totalling $22.02bn, compared to the expected $21.1bn.

Dow Jones - Risers

Boeing Co. (BA) $211.04 5.29%
Unitedhealth Group Inc. (UNH) $511.74 1.61%
Intel Corp. (INTC) $43.08 0.37%
Johnson & Johnson (JNJ) $158.90 0.08%