Fundamental Analysis

Equities in Europe and Wall Street Slide Amid Rate Cut Uncertainty

  • There is reduced market optimism regarding Fed rate cuts.
  • November’s US construction spending rose less than expected.
  • Britain’s manufacturing sector encountered a setback in its recovery efforts.

Equities in Europe and Wall Street dropped on Tuesday, accompanied by a decline in US government debt. This drop reflects reduced market optimism regarding prompt Fed interest rate cuts.

Equities and bonds (Source: Bloomberg)

Equities and bonds (Source: Bloomberg)

Meanwhile, the dollar surged against major currencies as the yield on the 10-year Treasury note increased. This also signaled reduced expectations for rate cuts in 2024.

Last week, the US benchmark’s yield reached as low as 3.783%. It exceeded the 150 basis points of rate cuts priced in by futures for the Fed’s target interest rate by next December. The decline came amid economic slowdown concerns. 

Jack Janasiewicz, portfolio manager and lead portfolio strategist at Natixis Investment Managers Solutions in Boston expressed concern about the market misinterpreting slowing growth as a warning sign for an imminent recession.

He emphasized the importance of the labor market, stating, “The risk is that we get a couple of soft prints, but the one that matters the most is going to be the labor market.” 

November’s US construction spending rose less than expected. However, the previous month’s data was revised sharply higher, indicating underlying strength. Meanwhile, a Reuters poll anticipates that 168,000 jobs were created last month, down from 199,000 in November. Additionally, there is an expected uptick in the unemployment rate from 3.7% to 3.8%.

Last week, the three major US stock indexes recorded monthly, quarterly, and annual gains as traders factored in a higher likelihood of Fed rate cuts this year. The benchmark S&P 500 closed the year within 1% of a record closing high set on Jan. 3, 2022.

According to the CME Group’s FedWatch Tool, futures indicate a 79% chance of a 25 basis point cut or more in the Fed’s overnight rate in March. Traders foresee the Fed’s target rate at 3.831% in December. 

London stocks began the year on a subdued note, facing downward pressure from losses in the financial sector and an increase in UK government bond yields to a two-week high. Simultaneously, the FTSE 100 marked the completion of its 40th trading year.

Meanwhile, data in Britain showed the manufacturing sector faced a setback in its recovery efforts. Output and employment experienced sharper declines in December compared to the previous month.