Powell's Remarks Rattle Markets: Rate Cut Expectations Diminish, Dollar Surges

Jerome Powell's recent comments have shaken up the markets. U.S. stock indices fell, while the dollar soared for the fifth day in a row. As a result, expectations for a rate cut in December dropped from 80% to 58%.

In his speech to business leaders in Dallas, Powell pointed out the strength of the U.S. economy. He mentioned that there’s no rush for the Federal Reserve to lower interest rates. He emphasized the Fed's commitment to reaching its 2% inflation target, highlighting the need for careful decision-making since inflation is still above desired levels.

Powell noted that productivity has increased faster over the last five years than at any point in the two decades before the pandemic. He claimed that the U.S. economy is performing better than other major economies. When discussing the rise in the October producer price index (PPI), he called it “more than just a bump,” but he remained confident about the path to achieving the 2% inflation goal.

These comments affected the interest-rate market. Fed futures now show a lower chance of a 25-basis-point cut in December. The CME FedWatch tool indicates that the odds have decreased to 58%, down from around 80% earlier in the day.

The S&P 500, tracked by the SPDR S&P 500 ETF Trust (SPY), closed down 0.6%. This wiped out gains from last week’s rate cut. The energy sector was the only one to finish positively, rising by 0.4%. In contrast, industrials and healthcare sectors both fell by 0.7%.

Top performers in the S&P 500 included Tapestry Inc. (TPR), Wynn Resorts Ltd. (WYNN), and First Solar Inc. (FSLR), which saw increases of 12.8%, 8.7%, and 7.2%, respectively. On the flip side, Leidos Holdings Inc. (LDOS) and Super Micro Computer Inc. (SMCI) dropped by 13.6% and 11.4%.

Technology stocks, tracked by the Invesco QQQ Trust (QQQ), declined by 0.7%, marking their fourth straight loss. The SPDR Dow Jones Industrial Average ETF (DIA) slipped by 0.5%, while small-cap stocks in the iShares Russell 2000 ETF (IWM) underperformed, falling by 1.3%.

The dollar continued to attract attention. The Invesco DB USD Index Bullish Fund ETF (UUP) recorded its fifth consecutive gain, reaching levels not seen since late October 2023. Treasury yields also rose, with the 10-year yield closing at 4.46%. Gold, tracked by the SPDR Gold Trust (GLD), marked its fifth straight loss.

In the crypto market, Bitcoin (BTC/USD) was down 1.7% over the past 24 hours, trading at $88,013 at 5:21 PM ET. It looks like it’s headed for its worst day in November.

Emerging market stocks have hit two-month lows, and volatility is expected to remain high, influenced by political developments like Trump’s red wave.