U.S. stocks slid after Federal Reserve officials delivered their fourth rate hike of 2018 and Fed Chairman Jerome Powell signaled that the central bank would continue to unwind its balance sheet at the current rate.
The S&P 500 (^GSPC) fell 1.54%, or 39.21 points, as of market close, with the consumer discretionary sector leading declines. The index had been up as much as 1.54% earlier in the session before the Fed’s announcement.
The Dow (^DJI) declined 1.49%, or 351.98 points, wiping out gains of more than 350 points earlier Wednesday and hitting a fresh low for the year. The Nasdaq (^IXIC) ended the session lower by 2.17%, or 147.08 points
The committee also noted that “some further gradual increases” in the target range for the federal funds rate are warranted, slightly changing the language from members’ previous assertion that “further gradual increases” would be needed. FOMC officials said risks are “roughly balanced” but that they are monitoring “global economic and financial developments” to determine the path forward.
The Fed’s latest dot plot points to two rate hikes for 2019 from three previously, followed by another increase in 2020 and none in 2021. The longer-run neutral interest rate expected to sustain full employment and price stability also edged down in December, with the median FOMC forecast now indicating the neutral rate is 2.8%, down from 3% in September.
The FOMC’s decision comes against a mixed backdrop for the economy and stock market. Economic data have been mostly strong, with the unemployment rate at a near 50-year low and GDP for the third quarter at a solid 3.5%. But stocks slumped to a 14-month low this week after having struggled for weeks following the Fed’s previous decision to raise rates in September.
Fed Chairman Jerome Powell’s comments at a press conference at 2:30 p.m. ET Wednesday sent U.S. equities tumbling. Stocks took a leg lower after Powell said that the Fed’s balance sheet reduction program, which currently allows $50 billion per month to run off its balance sheet, will continue as planned. However, the chairman also said that with the most recent rate hike, the Fed has arrived at the lower end of the neutral rate range, or a level that would neither overly stimulate nor slow the economy.
Powell also emphasized uncertainty around the forecasts from today’s statement. He addressed concerns of “crosscurrents” and “some softening” in light of recent weaker global growth and tighter financial conditions, but asserted that these developments have not fundamentally altered the Fed’s outlook.
Given the Fed’s four rate hikes this year, “monetary policy will be providing a smaller boost to the economy in 2019,” Powell said.
Bond yields on the long end of the yield curve fell Wednesday afternoon following the decision. The yield on the 10-year Treasury note slipped 5.6 basis points to 2.767%, while the yield on the 30-year Treasury notes slid 8.1 basis points to 2.996% as of 4:08 p.m. ET.
STOCKS: Two of the world’s largest drugmakers agree to combine consumer health businesses
GlaxoSmithKline (GSK, GSK.L) and Pfizer (PFE) will combine their consumer health-care businesses in a multibillion-dollar merger, bringing together the company’s household drug brands, including Centrum, Advil, Tums, Excedrin and Nicorette, under one joint venture, the two companies said in statements. Global sales for the combined businesses totaled $12.7 billion in 2017. Under terms of the deal, GSK will have a majority controlling stake of 68%, and Pfizer will have the remaining 32%. GSK plans to separate the new consumer health-care business and list it in London within three years. Shares of GSK rose 0.84% to $37.40 each on the NYSE as of market close. Shares of Pfizer fell 1% to $41.97 each, reversing earlier gains as the broader market declined.
Washington, D.C.’s attorney general has sued Facebook (FB) for failing to protect its users’ data in the wake of the Cambridge Analytica data scandal. The lawsuit was confirmed in a statement Wednesday from the Superior Court for the District of Columbia by Attorney General Karl Racine and was first reported by the Washington Post. The lawsuit alleges that Facebook’s “lax” privacy standards enabled a leak of millions of users’ data to take place, allowing users to download an application produced by Cambridge Analytica that then collected private information without users’ knowledge. Shares of Facebook fell 7.25% to $133.24 each as of 4:02 p.m. ET.
Shares of Johnson & Johnson (JNJ) extended declines after the company lost a motion to reverse a verdict awarding $4.7 billion to women blaming ovarian cancer on asbestos in the company’s talc products. Shares of the company have tumbled about 13% in the days following a Reuters report published last week stating that J&J knew for decades that its talc and Baby Powder products contained traces of asbestos. Shares of J&J fell 2.17% to $127.59 each as of market close.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., December 14, 2018. REUTERS/Brendan McDermid
FedEx (FDX) cut its earnings guidance and said its international business weakened due to global trade concerns, overshadowing a beat on earnings per share and revenue for the quarter. FedEx delivered adjusted earnings of $4.03 per share, 9 cents above consensus expectations, and revenue of $17.8 billion versus $17.69 billion expected. But the company now expects to earn between $15.50 and $16.50 per share in fiscal 2019, below consensus estimates of $17.73 per share. Analysts at UBS cut FedEx’s price target to $205 from $256 following the quarterly results. Shares of FedEx fell 12.03% to $162.75 each as of market close.
Semiconductor Micron Technology (MU) missed Wall Street’s expectations for quarterly revenue and announced plans to reduce capital expenditures in fiscal 2019. The company reported $7.91 billion in quarterly revenue, short of estimates of $8.02 billion. However, earnings were better than expected by a penny, coming out to $2.98 per share. Shares of Micron fell 7.92% to $31.41 each as of market close.
Shares of meal-delivery service Blue Apron (APRN) closed below $1 for the second time on Wednesday, down more than 90% from its initial public offering price of $10 per share in June 2017. The stock closed lower by 12.94% to 78 cents per share as of the end of Wednesday’s session. Stocks trading below $1 per share for more than 30 days are often de-listed from the New York Stock Exchange.
ECONOMY: Mortgage applications decline for the first week since mid-November
Mortgage applications declined 5.8% for the week ending December 14, reversing a 1.6% rise in applications for the week prior, according to thee Mortgage Bankers Association’s latest report. This was the first week that mortgage applications fell since November 16. Purchases fell 6.8% for the week ending December 14 after rising 1.8% in the week prior, while refinances fell 2.3% after rising 1.8% previously.
These results follow a report from Freddie Mac showing that the benchmark 30-year fixed-rate mortgage fell to 4.63%, the lowest level in three months, for the week ending December 13.
“Despite mortgage rates falling across the board last week to their lowest levels in three months, mortgage applications also declined, as more potential borrowers likely stayed away because of ongoing financial market volatility and economic uncertainty,” Joel Kan, MBA’s associate vice president of economic and industry forecasting, said in a statement. “Purchase applications decreased almost 7% over the week and refinances decreased around 2%, led by a larger decline in government refinances compared to conventional refinances.”
Existing home sales rose for a second consecutive month and topped consensus expectations for November, according to the National Association of Realtors. Sales of previously owned homes in the U.S. rose to a seasonally adjusted rate of 5.32 million in November, ahead of estimates of 5.2 million and October’s reading of 5.22 million existing home sales. Median existing-home prices for all home types rose 4.2% in November to $257,700.
“The data are volatile and the trend has been down, but the report should lessen fears that major weakening in housing is under way,” Jim O’Sullivan, chief U.S. economist for High Frequency Economics, wrote in a note Wednesday.
