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US stock indices ended trading on Tuesday almost at the same level, giving up the previously reached heights that had earlier allowed the S&P 500 and the Dow Jones Industrial Average to update their historical maximums. The reason for such caution was the expectation of the first interest rate cut by the Federal Reserve in 4.5 years.
During the trading session, the S&P 500 index briefly rose to 5670.81, which was facilitated by fresh data on the US economy. The data allayed fears of a sharp slowdown in the country's economy.
The Commerce Department reported that retail sales unexpectedly increased in August, despite a decline in auto dealership revenue. That decline was more than offset by a surge in online sales, which helped the economy remain stable for much of the third quarter.
Russell Price, chief economist at Ameriprise Financial Services in Troy, Michigan, said expectations for the economy were fairly optimistic even before the latest data were released. He said the economy is growing, but growth remains relatively slow.
"Today's economic data confirms that we are in an expansionary environment, although it is not as fast as we would like," Price said.
Price added that the upcoming rate cut could have a dual effect. It will either increase inflation fears or raise new questions about whether the Fed's measures are fast and decisive enough to prevent a recession.
"Today's trading session shows a move away from historical highs, as tomorrow may bring disappointment for some investors," the expert concluded.
This day showed that the markets are in a state of anticipation: all attention is focused on the Federal Reserve's further actions and their possible impact on the US economy.
Trading on US stock exchanges on Tuesday ended with minimal changes: the Dow Jones Industrial Average index fell by 15.90 points (0.04%) to 41,606.18, and the S&P 500 rose by 1.49 points (0.03%) and reached 5,634.58. Meanwhile, the Nasdaq Composite added 35.93 points, or 0.20%, to close at 17,628.06.
According to CME's FedWatch tool, the odds of the Federal Reserve cutting interest rates by 50 basis points after its two-day meeting on Wednesday are now priced at 65% by the market. Just a week ago, the odds were just 34%, reflecting investor expectations fluctuating amid economic uncertainty.
One of the key drivers of the S&P 500's gains was Microsoft's 0.88% gain in shares. The tech giant emerged victorious after its board approved a $60 billion share buyback program and raised its quarterly dividend by 10%. Such moves have bolstered investor confidence in the stability and future success of the AI leader.
The Dow Jones, despite a slight decline, continued to surprise, with the index hitting intraday record highs for two days in a row. Meanwhile, the Russell 2000 index, which tracks small-cap companies, was the best performer among the major indices, gaining 0.74% for the session. The gain can be attributed to investors' expectations that the Federal Reserve's rate cut will favor smaller companies.
The energy sector of the S&P 500 was the best performer among the 11 major sectors, gaining 1.41%. This happened against the backdrop of rising oil prices, which spurred oil stocks. At the same time, health care was the day's loser, falling 1.01%, becoming the weakest sector in the index. Investors continue to watch equity markets cautiously as they weigh the chances of further Federal Reserve action and its possible impact on economic growth prospects.
One of the key events on the stock market on Tuesday was the rise of Intel shares by 2.68%. This growth was due to the conclusion of an agreement with Amazon Web Services, a division of Amazon's cloud services, which became an Intel client for the production of individual chips used in the development of artificial intelligence. Amazon shares also showed positive dynamics, adding 1.08%.
Data on the results of trading on the New York Stock Exchange and Nasdaq showed that the number of shares that rose in price exceeded the number of shares that fell in price. On the NYSE, this ratio was 1.55 to 1, and on Nasdaq - 1.25 to 1. This indicates the prevalence of positive sentiment among investors.
The S&P 500 index showed 48 new 52-week highs, while not a single new low was recorded. The Nasdaq Composite saw more significant changes, with 147 new highs and 68 new lows. Total volume on U.S. exchanges was 10.23 billion shares, slightly below the 20-day average of 10.74 billion.
The labor market slowdown seen over the summer, as well as recent media reports, have raised expectations that the Federal Reserve will take more decisive action at its meeting on Wednesday. In particular, a 0.5% rate cut is looking increasingly likely as the Fed seeks to avoid weakening the economy.
Meanwhile, the latest U.S. economic data showed that retail sales increased in August and factory activity began to recover again. These stronger numbers may ease the pressure for an aggressive rate cut, but the market is still looking for decisive action from the Fed.
Stock markets remain tense as investors weigh the impact of positive economic data on the Fed's likely actions to maintain economic stability.
"The current data points to a healthy economy," said Peter Cardillo, chief economist at Spartan Capital Securities. He expects Fed Chairman Jerome Powell to decide on a 25 basis point cut at his meeting on Wednesday. However, the Fed's next steps will depend on how the economy evolves, which Powell is likely to hint at in his speech.
Cardillo noted that the Fed may consider a more aggressive approach at future meetings, but will proceed with caution for now. "They will start with small steps, but they may take more decisive measures as they go along," the expert added.
As they await the Fed's decision, markets continue to make predictions. According to CME Group's FedWatch tool, traders are pricing in a 63% chance that the Fed will cut rates by 50 basis points and a 37% chance that it will cut by 25 basis points.
The MSCI All-World Index, which tracks global markets, showed a modest gain of 0.04%, reaching 828.72, reflecting stable sentiment in global stock markets ahead of the Fed's key decisions.
Meanwhile, the dollar strengthened against its major counterparts, rising 0.28% to 100.98 in a basket of currencies. The dollar also showed solid gains against the Japanese yen, rising 1.19% to 142.29.
It's not just the Fed that has investors' attention this week. The Bank of England and the Bank of Japan are also scheduled to meet to discuss their monetary policy. However, unlike the Fed, these regulators are expected to keep interest rates at current levels.
Russell Price, chief economist at Ameriprise Financial Services, commented on the current market sentiment. "Today's trading shows that we are on the brink of a major decision. Tomorrow, some investors are likely to face disappointment," Price said.
All eyes are on tomorrow's Fed meeting, which could set the tone for future economic developments both in the U.S. and globally.
The yield on two-year U.S. Treasuries, a gauge of short-term interest rate expectations, rose 4.4 basis points to 3.5986%, after falling to a two-year low of 3.528% in the previous session. The 10-year yield also rose, rising 2.3 basis points to 3.644%, up from 3.621% late Monday.
Asian markets were weighed down by China's fragile economic recovery. The latest data released over the weekend showed industrial output growth slowed to a five-month low in August, while retail sales and new home prices continued to decline, adding uncertainty to the recovery picture in the region's largest economy.
Oil prices rose as the industry continues to analyze the impact of Hurricane Francine, which has affected oil production in the US Gulf of Mexico. US crude oil rose 1.57% to $71.19 per barrel. Brent crude ended the day at $73.7 per barrel, up 1.31%. The gains were due to uncertainty surrounding the recovery of oil production in the region following the natural disaster.
Despite spot gold hitting a record high on Monday, prices corrected lower on Tuesday. Gold fell 0.51% to $2,569.51 per ounce. The decline followed a strong rally earlier in the week, but gold remains an important indicator of market sentiment, reflecting demand for safe havens amid global uncertainty. Economic dynamics around the world, including the US and China, continue to impact markets, causing swings in bond yields, oil and gold prices.
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