Holiday Markets Struggle Amid Washington Turmoil and Hawkish Fed Expectations
The holiday season has brought a mix of challenges and uncertainty to investors, with markets still recovering from the volatility of last week. Despite the Federal Reserve’s third consecutive interest rate cut on Wednesday, the Dow Jones Industrial Average broke a 10-day losing streak but recorded a loss of 2.3% for the week, while the Nasdaq Composite shed 1.8%, and the S&P 500 fell 2%. The threat of a government shutdown and hawkish signals from the Federal Reserve have weighed heavily on markets, with investors now set to receive a relatively sparse schedule of economic news amidst the shortened holiday trading week.
Markets React to Fed’s Shallow Rate-Cutting Path
In the days leading up to Christmas, investors are grappling with the implications of the Fed’s changing tone, which has shifted from a promise of four rate cuts in 2025 to just two. This revised policy approach, which Fed Chairman Jerome Powell described as "higher for longer," is being met with a mix of caution and optimism on Wall Street. While some see this shift as a signal that the Fed is responding to increased uncertainty around inflation, others argue that it may be pre-emptively adjusting its stance in anticipation of potential policy changes under President-elect Donald Trump.
The ‘Fed Grinch’
Federal Reserve Board Chairman Jerome Powell has been vocal about his concerns regarding persistent inflation, which he believes poses a threat to the Fed’s 2% objective. In contrast, Beth Hammack, president of the Cleveland Fed and the lone dissenter in the Fed’s most recent policy decision, expressed her reservations about cutting rates during a Wednesday news conference held at the Federal Reserve headquarters. "There is more work to do on inflation," she said, arguing that monetary policy was not far from a neutral stance.
Getting Ahead of Trump
While the exact meaning behind the Fed’s shifting tone remains unclear, market observers are beginning to speculate about how this may affect their efforts to slow inflation under President-elect Donald Trump. According to Mohamed El-Erian, chief economic adviser at Allianz, there is a growing school of thought that believes the Fed is pre-positioning itself for the disruptions expected in the coming years under Trump’s administration. This could include potential policy changes, such as significant tariffs or immigration legislation.
Policy Uncertainty Ahead
Some analysts argue that this caution is warranted, given the complexities of navigating an increasingly volatile economic landscape. "The only thing we can be certain of is that there will be even more uncertainty in early 2025," said Chris Zaccarelli, chief investment officer for Northlight Asset Management.
Weekly Economic Calendar
Here’s what Wall Street should expect from this week’s shortened trading schedule:
- Monday:
- Conf. Board Consumer Confidence for December (expected: 113; previously: 111.7)
- Notable earnings announcements are scarce
- Tuesday:
- Markets close at 1 p.m. ET in observance of Christmas Eve
- Building permits, November (previously 6.1%); Durable Goods Orders, November (-0.3% expected; previously -0.3%)
- Wednesday:
- Markets closed on Christmas Day
- Thursday:
- Initial jobless claims for the week ended December 21 (prior: 220k)
- Notable earnings announcements are scarce
- Friday:
- Wholesale inventories, month-over-month in November (previously: 0.2%); not notable earnings announced