US stocks fell on Wednesday as optimism over interest rate cuts dimmed while worries over China's economy continued a challenging start to the year for investors.
The Dow Jones Industrial Average (^DJI) fell almost 0.3%, while the S&P 500 (^GSPC) slid nearly 0.6%, set to build on Tuesday's losing start to the holiday-shortened week. The Nasdaq Composite (^IXIC) was down about 0.6%.
The move lower in stocks comes as investors have trimmed their bets for a March rate cut. As of Wednesday, investor bets place a 57% chance the Fed cuts in March, per the CME FedWatch Tool. That's down from a 67% chance last week and a 71% chance seen a month ago.
Another knock back came from disappointing GDP data, suggesting that China's growth is flagging despite stimulus measures. Oil prices fell amid fears of a pullback in demand from the world's second-biggest economy.
Also out Wednesday, the December retail sales report showed consumer spending remains resilient. Retail sales grew 0.6%inDecember, according to Census Bureau data. Economists had expected a 0.4% increase, according to Bloomberg data.
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Josh Schafer
US economic output hits seven month-high
Economic output hit its highest level in 7 months during January.
S&P Global's flash US composite PMI, which captures activity in both the services and manufacturing sectors, came in at 52.3 in January, up from 50.9 in December and better than the 51.0 that had been expected by economists.
S&P reported business confidence reached a 20-month high while prices charged, a measure of inflation, rose at its slowest pace since May 2020. The manufacturing index saw the largest increase with a reading of 50.3 up from 47.9, the month prior. The services component of S&P's report showed the index registered 52.9 this month, up from 51.4 in December.
Any reading above 50 for these indexes represents expansion in the sector; readings below 50 indicate contraction.
“An encouraging start to the year is indicated for the US economy by the flash PMI data, with companies reporting a marked acceleration of growth alongside a sharp cooling of inflation pressures," Chris Williamson, the chief business economist at S&P Global Market Intelligence said in the release.
Josh Schafer
Stocks close lower on Wednesday
Stocks recovered some losses but still finished Wednesday's trading session lower as the debate around whether or not the Federal Reserve will cut interest rates in March intensifies.
The Dow Jones Industrial Average (^DJI) fell almost 0.3%, while the S&P 500 (^GSPC) slid nearly 0.6%, set to build on Tuesday's losing start to the holiday-shortened week. The Nasdaq Composite (^IXIC) was down about 0.6%.
The move lower in stocks comes as investors have trimmed their bets for a March rate cut. As of Wednesday, investor bets place a 57% chance the Fed cuts in March, per the CME FedWatch Tool. That's down from a 67% chance last week and a 71% chance seen a month ago.
Josh Schafer
Strong economic data is pushing rates higher but that's not entirely a bad thing
A surprise December retail sales report showed the US consumer ended 2023 in a stronger position than many thought.
Treasury yields inched higher on the news with the 10-year Treasury yield reaching 4.12%, up about 5 basis points.
This, Renaissance Macro's head of economics Neil Dutta points out, has been a trend recently on data releases.
"Looking at what we have seen so far in 2024, rates have declined on inflation days (CPI/PPI) and have increase on activity days (ADP/claims, NFP, and retail sales)," Dutta wrote in a note on Wednesday. "Put differently, rates have gone up because economic growth has been firmer, not because inflation has been stronger."
To Dutta's point, the yield on 10-year Treasury notes and the 30-year bond, for instance, have each risen about 30 basis points, respectively, since late December. The 10-year is currently trading near 4.1% after reaching a recent low closer to 3.8%, while the 30-year stands at just above 4.3% after falling as low as 3.95% in December.
And while the moves in rates have sent stocks lower in the near term, Dutta points out that what's driving the action should actually be good for stocks in the long term.
When accepting that strong data is driving rate moves, Dutta wrote, "It means earnings should be fine, which will ultimately support stock prices."
Myles Udland
Fed's Beige Book shows most districts report 'little or no change' in economic activity
The Federal Reserve's Beige Book out Wednesday showed the economic state of play for most of the country was little changed over the last month or so.
The report, which forms the groundwork for the economic conversation Fed officials will have at the FOMC meeting later this month, showed a "majority of the twelve Federal Reserve Districts reported little or no change in economic activity since the prior Beige Book period. Of the four Districts that differed, three reported modest growth and one reported a moderate decline."
As a collection of anecdotes gathered from business contacts across the country, the Beige Book tends to offer more in the way of interesting nuggets than prompting wide-ranging reassessment of the economy's direction.
In the New York Fed's district, for instance, labor market showed that while "...the availability of workers has improved, contacts noted that demand for workers softened as economic uncertainty inhibited hiring plans. Indeed, many mid-sized companies have stopped hiring, while smaller companies have become more selective in who they hire. Contacts across a variety of sectors noted that attrition remains exceptionally low."
In the Minneapolis Fed's district, workers have turned to subsistence farming to make ends meet — "A labor contact in the Upper Peninsula of Michigan shared that the exodus of public sector workers to the private sector had slowed. They said that high food prices in the area, particularly for meat, continued to stretch workers' budgets. 'I am hearing our union members talk more about starting to raise chickens and ducks... I am seeing more self-serve egg stands along the road,' they added."
In the Cleveland Fed's district, "One large general merchandiser said that lower-income households had become more reliant on credit cards and 'buy now, pay later' payment options in recent months and was skeptical that these customers could sustain their current level of spending once seasonal promotions ended."
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How the S&P 500 reaches 6,500 by the end of next year
The team at Capital Economics was among the most bullish we found on the outlook for stocks in 2024.
The firm sees the benchmark S&P 500 rising to 5,500 by the end of this year, and adding another 1,000 points — roughly 18% — through the end of 2025, hitting 6,500 in a little under two years.
In a note to clients published Wednesday, the firm's chief markets economist, John Higgins, walked through the main pillars of this forecast as investors have kicked off the year with some trepidation.
Higgins's view most simply boils down to an argument that earnings can continue to rise and AI hype will ultimately inflate a stock market bubble.
Comparing the conditions for the market today to those that preceded the tech bubble in the late '90s, Higgins notes, among other things, that while valuations for the market's tech leaders are elevated, there isscope for valuations to rise further both for this basket of stocks and the market overall.
The simplest way to think about valuations rising is that stock prices — or the amount investors pay for each $1 of earnings — rise while actual profits don't.
"Our current end-2024 and end-2025 forecasts for the S&P 500 are 5,500 and 6,500, respectively," Higgins wrote. "Punchy as these projections may appear, the valuation of the index would only have to rise to roughly the level it reached before the dot com bubble burst for them to be [realized] — based on what are think are plausible outcomes for EPS."
"Our analysis leads us to conclude that, provided the economy skirts a recession, there is scope for a bubble to inflate in the S&P 500 this year and next," Higgins added.
"We envisage the index becoming even more top heavy in the process, but do think that most sectors will fare well even if those that stand to benefit the most from the advent of AI keep leading the charge."
Josh Schafer
Forecasts for fourth quarter economic growth are improving
Forecasts are increasingly projecting that the US economy ended a year many projected to result in a recession on solid footing.
The Atlanta Fed's GDPNow forecaster was revised up on Wednesday to project the US economy grew at annualized rate of 2.4% in the fourth quarter. The previous projection from Jan 10 had projected the economy grew at a 2.2% rate.
On January 17, the #GDPNow model nowcast of real GDP growth in Q4 2023 is 2.4%. https://t.co/T7FoDdgYos #ATLFedResearch
Download our EconomyNow app or go to our website for the latest GDPNow nowcast. https://t.co/NOSwMl7Jms pic.twitter.com/QE7R7xSOpx
— Atlanta Fed (@AtlantaFed) January 17, 2024
The move higher comes after December's retail sales report surprised Wall Street to the upside. Retail sales grew 0.6%inDecember, according to Census Bureau data. Economists had expected a 0.4% increase, according to Bloomberg data.
The report prompted the team at Goldman Sachs to also boost its GDP forecast.
"The December retail sales report was above our previous expectations and implies upside to our Q4 consumption estimates. Following today’s data, we boosted our Q4 GDP tracking estimate by 0.3pp to +1.8% (qoq ar) and our Q4 domestic final sales growth forecast by the same amount to +2.5% (qoq ar)," Goldman's economics team wrote.
Josh Schafer
Interest rate sensitive sectors lead stocks lower
It's a sea of red with all 11 sectors in negative territory Wednesday afternoon as investors scaled back bets on a Federal Reserve interest rate cut in March.
The Dow Jones Industrial Average (^DJI) fell 0.3%, while the S&P 500 (^GSPC) slid 0.7%, set to build on Tuesday's losing start to the holiday-shortened week. The Nasdaq Composite (^IXIC) was down roughly 1%.
Interest rate sensitive sectors like Utilities (XLU) and Real Estate (XLRE), which ripped higher amid the soft-landing euphoria following the Fed's December meeting, are the day's biggest laggards. Real Estate is down more than 2% on the day and now off more than 4% this month.
Josh Schafer
The poorest Americans are getting the biggest benefit from falling inflation
Inflation's rapid decline is benefiting America's lowest earners.
In research released on Tuesday, Oxford Economics reported that real wage growth, which is adjusted for inflation, is currently the strongest in the lowest-income quartile at about 3%, compared to just more than 1% growth for the highest-income earnings.
This, Oxford Economics argues, could be crucial for the resilient consumer spending story to continue in 2024.
"Beyond being good news for low earners, it adds reasons for optimism on the broader outlook for consumer spending at the margins," Oxford Economics lead US economist Michael Pearce wrote in a note to clients. "The lowest quartile of the population account for just 8% of income, but they have a much higher propensity to consume out of income, accounting for 13% of spending."
Josh Schafer
Spirit stock stumbles further
Spirit (SAVE) stock tumbled about 25% on Wednesday morning.
The move extends the roughly 50% loss seen in shares of the low-cost carrier on Tuesday after a federal judge blocked a planned merger between JetBlue (JBLU) and Spirit.
Bank of America placed an Underperform rating on Spirit Wednesday with a $5 price target.
"We believe SAVE has a difficult path ahead to return to its historical level of growth and profitability, which could create risk for the $1.1B in debt due in September 2025," Bank of America analyst Andrew Didora wrote in a note to clients on Wednesday.
Dani Romero
Homebuilders are feeling better about the housing market as mortgage rates fall
Lower mortgage rates fueled an increase in homebuilder enthusiasm to start the new year.
Builders’ confidence rose 7 points to 44 in January, per the National Association of Home Builders/Wells Fargo Housing Market Index, marking a second consecutive monthly gain.
“Lower interest rates improved housing affordability conditions this past month, bringing some buyers back into the market after being sidelined in the fall by higher borrowing costs,” said NAHB chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala., in a press release.
“Single-family starts are expected to grow in 2024, adding much needed inventory to the market. However, builders will face growing challenges with building material cost and availability, as well as lot supply.”
Builders’ sales expectations for the next six months jumped 12 points to 57. A number above 50 is considered good.
Builders still kept slashing home prices to drive up sales, with 31% reporting cutting them, down from 36% during the previous two months, the lowest rate since last August, per the NAHB report.
Over 60% of builders continue to roll out some type of sale incentive in January to entice more buyers back into the market.
Josh Schafer
March rate cut bets are receding
Markets are continuing to price in less of a chance that the Federal Reserve cuts interest rates in March.
As of Wednesday, investor bets place a 57% chance the Fed cuts in March, per the CME FedWatch Tool. That's down from a 67% chance last week and a 71% chance seen a month ago.
The move comes amid commentary from central bankers that the Fed will be patient in its cutting approach.
"With economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past," Fed governor Christopher Waller said in a speech at the Brookings Institution in Washington.
The tampered expectations for Fed cuts have hit interest rate-sensitive areas of the market that initially soared to end 2023. In January alone, the Russell 2000 (^RUT) is now down 6%.
Josh Schafer
Stocks open lower
US stocks fell on Wednesday to signal no letup in a rough January, as investors' optimism for interest rate cuts got a reality check and worries grew about China's economy.
The Dow Jones Industrial Average (^DJI) fell 0.3%, while the S&P 500 (^GSPC) slid 0.7%, set to build on Tuesday's losing start to the holiday-shortened week. The Nasdaq Composite (^IXIC) was down roughly 1.1%.
Stocks have struggled as policymakers push back against persistent bets that central banks will cut rates early and often in 2024. ECB president Christine Lagarde on Wednesday joined the likes of Federal Reserve governor Chris Waller in warning that expectations of imminent loosening are too high.
Brett LoGiurato
Stock futures tumble with retail sales in focus
Good morning! Stock futures are down this Wednesday morning, continuing their slow start to the year. Retail sales are the big data point to watch today, coming at 8:30 a.m. ET.
Earnings today: Charles Schwab (SCHW), Alcoa (AA), Discover (DFS), U.S. Bancorp (USB), Kinder Morgan (KMI), Citizens Financial (CFG), Prologis (PLD).
