Powell on Thursday pointed to ongoing economic growth, a solid job market, and inflation above the Fed’s 2% target as reasons the US central bank can afford to be careful with the pace and scope of future rate cuts.
As a result, traders increased bets the Fed will not change rates at its December meeting, pricing in a 38% chance, compared with roughly 14% a month ago, according to the CME FedWatch tool. They also dialled back expectations for easing in 2025.
This view was reinforced by this week’s news of sticky inflation and Friday’s economic data showing US retail sales rose slightly more than expected in October, which signalled economic strength. Import prices also rebounded.
“In the past 48 hours we’ve had some pretty big changes, not just from the election but from economic data that was better than expected and Powell speaking about not having to be as aggressive on interest rate cuts,” said Adam Rich, deputy chief investment officer for Vaughan Nelson in Houston.
“Market expectations for interest rate cuts have come down materially and also the market is readjusting after a pretty bullish reaction to the US election.”
All three major US stock indexes were headed for weekly losses as market focus shifted from the US election to rate cuts and potential inflation risks under the next administration.
Stocks of vaccine makers and packaged food companies also dipped after Trump said he would nominate Robert F Kennedy Jr, who has spread misinformation on vaccines and criticised ultra-processed foods, to head the department of health and human services.
As of 03.03pm ET, the Dow Jones Industrial Average fell 318.33 points, or 0.73%, to 43,432.53, the S&P 500 lost 83.78 points, or 1.41%, to 5,865.39 and the Nasdaq Composite dropped 450.89 points, or 2.36%, to 18,657.10.
Also contributing to volatility on Friday was the regular expiration of stock and index options, according to Rich.
Since the post-election rally in stocks had reduced expectations for stock market volatility to multi-month lows, Brent Kochuba, founder of financial insights company SpotGamma, said Friday’s stock market weakness was partly due to investors being ill-prepared for a pullback.
CBOE’s volatility index, also known as Wall Street’s fear gauge, hit 17.55 on Friday, its highest level since election day on Nov 5.
Shares of defence firms and government contractors extended their losing streak after Trump named Elon Musk and former Republican presidential candidate Vivek Ramaswamy to head a new department of government efficiency.
Among the S&P 500’s 11 major industry sectors information technology was the biggest decliner, dropping 2.6%. Rich noted that investors appeared to rotating out of sectors that worked ahead of the election.
Also, it did not help that the Philadelphia SE Semiconductor index fell 3.4%. The chip sector lost ground partly in sympathy with Applied Materials, which tumbled 9% after the US maker of chip-manufacturing equipment forecast first-quarter revenue below Wall Street estimates.
Moderna slumped 6.5% and Pfizer lost 4.8%, while the healthcare sector dropped 1.9%, hitting its lowest since May.
The consumer staples index segment was also impacted by the nomination news, with Monster Beverage was off 6%, Lamb Weston down 4.6% and PepsiCo down 4%.
The small-cap Russell 2000 index fell 1.5%, heading for its fourth consecutive session of declines and biggest weekly decline in over two months.
Declining issues outnumbered advancers by a 2.19-to-1 ratio on the NYSE where there were 96 new highs and 100 new lows.
On the Nasdaq, 1,116 stocks rose and 3,118 fell as declining issues outnumbered advancers by a 2.79-to-1 ratio. The S&P 500 posted 11 new 52-week highs and 24 new lows while the Nasdaq Composite recorded 31 new highs and 265 new lows.