The Fed's Surprise "Hawkish" Turn: 25-Basis-Point Cut Triggers Stock Market Plunge and Global Market Turmoil

The Fed's Surprise "Hawkish" Turn: 25-Basis-Point Cut Triggers Stock Market Plunge and Global Market TurmoilReasons Behind the Fed's "Hawkish" Stance and Market Reaction:This action sharply contrasted with market expectations of continued significant rate cuts by the Fed next year, further fueling US equity gains. The Fed's cautious stance triggered a surge in US Treasury yields, with the 10-year Treasury yield briefly exceeding 4

The Fed's Surprise "Hawkish" Turn: 25-Basis-Point Cut Triggers Stock Market Plunge and Global Market Turmoil

On December 13th, the Federal Reserve (Fed) cut the federal funds rate by 25 basis points as expected, lowering the target range to 4.25%-4.50%. However, this move, contrary to market expectations, triggered significant global market turmoil. Fed Chair Jerome Powell's subsequent press conference delivered a "hawkish" message, raising future policy rate and inflation projections. He suggested only two rate cuts totaling 50 basis points next year, significantly less than the market's widely anticipated cuts. This unexpected stance caused a sharp rise in US Treasury yields and the dollar, while non-US currencies, gold prices, and US equities plummeted, driving a surge in risk aversion. The Dow Jones Industrial Average (Dow) suffered a drop of over 1100 points, its longest losing streak since 1974, extending a ten-day decline.

Reasons Behind the Fed's "Hawkish" Stance and Market Reaction:

The Fed's hawkish posture stemmed from persistent concerns about inflation. Although inflation data has cooled, it remains above the Fed's 2% target. Powell emphasized the need for new, compelling evidence of inflation decline before further easing monetary policy. Furthermore, dissenting votes on the rate cut highlighted internal caution within the Fed regarding further reductions.

This action sharply contrasted with market expectations of continued significant rate cuts by the Fed next year, further fueling US equity gains. The Fed's cautious stance triggered a surge in US Treasury yields, with the 10-year Treasury yield briefly exceeding 4.50%, putting immense pressure on the stock market. Investor confidence took a severe hit, risk aversion spread rapidly, and the US stock market plunged. The Dow closed down 2.58%, or over 1123 points; the S&P 500 fell 2.95%; and the Nasdaq Composite dropped 3.56%. Small-cap stocks fared even worse, with the Russell 2000 index down 4.39%, its worst single-day performance since the July arbitrage trading collapse. The VIX volatility index soared 74.04%, closing at 27.62.

All sectors of the US equity market were hit hard. Banking ETFs fell over 5%, and technology and discretionary consumer goods sectors also suffered heavily. The "Magnificent Seven" tech giants (Apple, Microsoft, Amazon, Google, Meta, Tesla, and Nvidia) experienced widespread declines, with Tesla falling over 8% and Micron Technology plunging over 17% in after-hours trading. Chip stocks also fell broadly, with the Philadelphia Semiconductor Index down 3.85%.

AI stocks were not spared, with many experiencing declines. However, Nvidia, a leading AI company, despite briefly rising over 4.8% during the day, ultimately closed down 1.14%. This demonstrates that even companies benefiting from AI growth are vulnerable to worsening macroeconomic conditions.

Chinese ADRs (American Depositary Receipts) were also impacted, with the Nasdaq Golden Dragon China Index down 2.41%. Many popular Chinese stocks fell, with only Li Auto showing a slight increase. Cryptocurrency stocks also performed poorly, with Coinbase dropping over 10%.

Global Market Turmoil:

The Fed's hawkish stance severely impacted not only the US stock market but also global markets. The US dollar index surged over 1%, reaching a two-year high. The offshore yuan briefly fell below 7.32 against the dollar, a one-year low. Gold prices plummeted over 2%, with spot gold reaching a one-month low. While oil prices initially rose in early trading, they ultimately closed lower due to the Fed's decision.

European Market Reaction:

In contrast to the US market, the Eurozone's final November CPI reading was only 2.2%, below expectations, supporting further rate cuts by the European Central Bank (ECB). The ECB has previously cut rates four times and hinted at further cuts in 2025. However, amid increased uncertainty, the ECB did not set a specific interest rate path, maintaining policy flexibility.

In the UK, inflation rose to an eight-month high of 2.6%, exceeding the Bank of England's 2% target, intensifying concerns about stagflation. Market expectations for Bank of England rate cuts were reduced, with the expectation that the Bank will maintain rates at 4.75% this Thursday.

Institutional Views:

Morgan Stanley expects the Bank of England to begin cutting rates only in February 2025. Some analysts believe that Chair Powells hawkish remarks could trigger further stock market selloffs.

Conclusion:

The Fed's hawkish move triggered severe global market turmoil. The dollar rose, while non-US currencies, gold, and equities generally fell. Concerns about the future economic outlook intensified, and investor confidence suffered. The Fed's decision signifies that the path to global economic recovery remains challenging. Markets will closely monitor subsequent Fed policies and inflation data for further clues. This event serves as a reminder of the profound impact of macroeconomic policy shifts on markets, demanding cautious responses. While some institutions have raised price targets for certain companies, overall market sentiment remains cautious, requiring close attention to upcoming economic data and policy direction. Market volatility remains high; investors should manage risk carefully and invest prudently.