Stock Markets: Fed’s reality check

Stock Markets: Fed’s reality check

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A trader reacts as a screen displays the Fed rate announcement on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., December 13, 2023. 

Brendan Mcdermid | Reuters

This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

What you need to know today

Markets start week lower
U.S. stocks started the shortened week lower on Tuesday as investors closely watched fourth-quarter earnings, while tracking an uptick in Treasury yields after a Federal Reserve official said the central bank’s interest rate cutting cycle could be slower than what Wall Street expected. European stocks ended the session lower, with fashion brand Hugo Boss tumbling 9% after lower than expected earnings.

Slower pace of Fed cuts
Federal Reserve Governor Christopher Waller said there will be monetary policy loosening this year but the central bank could do it at a slower pace. “In many previous cycles … the FOMC cut rates reactively and did so quickly and often by large amounts.” For this cycle, he said, “I see no reason to move as quickly or cut as rapidly as in the past.”

China’s growth
Speaking at the at the World Economic Forum in Davos, Switzerland, Chinese Premier Li Qiang said China’s economy grew by around 5.2% in 2023 — slightly better than the official target of around 5%. It comes as Beijing is set to release official GDP numbers on Wednesday. A Reuters poll also forecasts 5.2% growth for China in 2023. Premier Li also said innovations in technology shouldn’t be used as means to contain or restrict other countries.

More Big Bank earnings
Goldman Sachs and Morgan Stanley reported earnings on Tuesday, wrapping up results for Wall Street’s biggest six lenders. Morgan Stanley’s fourth quarter revenue topped analysts’ estimates but the bank warned of economic and geopolitical risks. Goldman Sachs exceeded expectations, boosted by higher asset and wealth management revenue.

[PRO] The hunt for quality stocks
Markets have cooled off from the massive gains in the latter part of 2023. Amid this loss of momentum, the pros say investors must look toward quality names. Quality stocks are defined as those that have robust earnings, low debt and a stock price that’s less likely to be impacted by a broad market selloff.

The bottom line

Wall Street returned for the first day back after a long weekend, only to be rudely awoken by a reality check from a Fed official.

The blue-chip Dow Jones Industrial Average closed 0.62% lower, while the S&P 500 dropped 0.37%. The tech-heavy Nasdaq Composite ended with a 0.19% dip.

Federal Reserve Governor Christopher Waller said there’s “no reason” for the central bank to “move as quickly” in its approach to lower interest rates this year. His comments were in sharp contrast to the aggressive policy loosening that markets are expecting this year.

Traders still see a more than 64% chance of the Fed cutting interest rates by 25 basis points to 5%-5.25% range at its meeting in March, according to the CME Group’s FedWatch tool. Those bets came down substantially from a near 77% chance of rate cuts on Friday, when data showed producer prices unexpected dropped in December.  

Looking across the Atlantic, the World Economic Forum in Davos saw plenty more discussions on the second day.

Artificial intelligence remained a hot topic, with Microsoft CEO Satya Nadella advocating for its uses, noting that more countries are now talking about AI in similar ways.

“I think [a global regulatory approach to AI is] very desirable, because I think we’re now at this point where these are global challenges that require global norms and global standards,” Nadella said.

Microsoft is a big player in the AI arms race.

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