Global Stocks Tumble as Fed Signals Slower Rate Cuts

Global stock markets experienced their most significant weekly decline in two months, while US Treasury yields hit a five-and-a-half-month high on Friday, as economic data and statements from Federal Reserve officials indicated a less aggressive approach to interest rate cuts, reports Reuters.

This shift in expectations followed comments from Fed Chair Jerome Powell on Thursday, who stated that the central bank didn't need to rush into further rate reductions given ongoing economic growth, a robust job market, and inflation remaining above the 2% target.

The US Commerce Department's Friday report on retail sales showed a 0.4% increase in October, exceeding economists' predictions of a 0.3% rise. This followed an upwardly revised 0.8% increase in September. However, the Labor Department also reported that import prices unexpectedly rose 0.3% in October, reversing September's 0.4% decline, due to higher prices for fuels and other goods.

"In the last 48 hours we've had some pretty big changes, not just from the election but from economic data that was better than expected and Powell speaking about not having to be as aggressive on interest-rate cuts," said Adam Rich, deputy chief investment officer for Vaughan Nelson, to Reuters. "Market expectations for interest-rate cuts have come down materially and also the market is re-adjusting after a pretty bullish reaction to the U.S. election."

Following the US presidential election, equities had initially rallied, as investors anticipated benefits from President-elect Donald Trump's policies, including higher import tariffs, tax cuts, and deregulation. However, these gains have diminished in recent days as markets reassess the Fed's rate-cutting trajectory and potential legislative changes.

On Wall Street, the Dow Jones Industrial Average fell 0.70%, the S&P 500 dropped 1.32%, and the Nasdaq Composite declined 2.24%. For the week, the S&P 500 fell 2.08%, the Nasdaq decreased 3.15%, and the Dow lost 1.24%.

Further clouding the outlook for rate cuts, other Fed officials made comments on Friday that added to the uncertainty surrounding the timing and extent of future reductions.

MSCI's gauge of global stocks slumped 1%, on track for its fourth consecutive decline and its largest weekly percentage drop since early September. In Europe, the STOXX 600 index closed down 0.77% but managed a small weekly gain.

Bond yields and the dollar have risen not only due to growth prospects but also concerns that Trump's policies could reignite inflation and necessitate increased government borrowing, potentially altering the Fed's course of monetary easing.

The dollar index fell 0.12% on the day but is poised for its biggest weekly percentage gain since early October. Against the Japanese yen, the dollar weakened 1.24%, while sterling fell 0.45% against the dollar.

Expectations for a 25-basis-point rate cut at the Fed's December meeting have dropped to 58.4%, down from 72.2% in the prior session and 85.5% a month ago, according to CME's FedWatch Tool.

The yield on benchmark US 10-year notes rose 1.9 basis points to 4.439%, reaching a high of 4.505% earlier in the day, its highest level since May 31.