Stock Market Update

[BRIEFING.COM] An unsurprising decision by the FOMC to leave the fed funds rate unchanged did little to sway the stock market from its modest early gains, but comments from Fed Chair Powell during his press conference sent September rate cut expectations lower, with stocks and treasuries facing some impulse selling as a result.

The Fed opted to keep the fed funds rate range between 4.25% and 4.50%, though Fed Governors Waller and Bowman voted in favor of a 25-basis-point rate cut, representing the first dissent by two Fed governors since 1993.

Fed Chair Powell said in his press conference that there is scope to reduce rates once conditions are met, but large cuts are unlikely unless the labor market weakens significantly and the economy is not showing signs of being held back by restrictive policy.

The comments sent the probability of a September rate cut tumbling, with the implied probability now 48.1%, down from 64.6% yesterday. 

Selling pressure in the stock market ensued, sending the major averages into negative territory after spending the majority of trade with modest gains.

The Nasdaq Composite (+0.2%) was able to recapture a modest gain, while the S&P 500 (-0.1%) and DJIA (-0.4%) finished with losses.

This morning's early gains came on low volume and nearly even breadth figures, reflecting a wait-and-see approach in the market that left it vulnerable to volatility following the FOMC decision.

At the bottom of the afternoon slide, only the utilities sector (+0.7%) remained in positive territory for the day, though a late rally saw the information technology (+0.4%) and communication services (+0.2%) resurface with modest gains.

A modest outperformance in mega-cap stocks supported the latter two S&P 500 sectors, as the Vanguard Mega Cap Growth ETF finished the day with a 0.3% gain.

Elsewhere, losses were broad-based, with the materials (-2.0%), real estate (-1.4%), and energy (-1.4%) sectors closing with the widest losses in the wake of the FOMC announcement. 

U.S. treasuries also finished Wednesday on their lows, as the 10-year note settled up six basis points to its 200-day moving average at 4.38%. The July FOMC decision overshadowed the morning release of the U.S. Treasury's latest quarterly refunding statement, in which the Treasury said that the frequency of nominal buybacks of longer-dated Treasuries will be increased.

Today's data included a solid advance reading of Q2 GDP, which gives the central bank more room to delay the next cut. The market also received a stronger-than-expected ADP Employment Change report for July.

A sizable batch of earnings reports had little impact on the broader market this morning, but upcoming results from Microsoft (MSFT 513.24, +0.67, +0.1%) and Meta Platforms (META 695.21, -4.79, -0.7%) after today's close could help spark a rebound if the numbers impress.

• Nasdaq Composite: +9.4% YTD
• S&P 500: +8.2% YTD
• DJIA: +4.5% YTD
• S&P 400: +2.1% YTD
• Russell 2000: +0.1% YTD

Reviewing today's data:

• Weekly MBA Mortgage Applications Index -3.8%; Prior 0.8%
• July ADP Employment Change 104K (Briefing.com consensus 78K); Prior was revised to -23K from -33K
  • The key takeaway is that, while the overall employment growth was modest, it was broad-based with gains for small, medium, and large establishments. In brief, it was not a report that signals any material weakness in the labor market.
• Q2 GDP-Adv. 3.0% (Briefing.com consensus 2.5%); Prior -0.5%, Q2 GDP Deflator-Adv. 2.0% (Briefing.com consensus 2.6%); Prior 3.8%
  • The key takeaway from the report is the recognition that the stronger growth was fueled by the decrease in imports (-30.3%), which are a subtraction in the calculation of GDP. The net exports component contributed 4.99 percentage points to Q2 GDP growth.
• June Pending Home Sales -0.8% (Briefing.com consensus 0.4%); Prior 1.8%