Wall Street remained cautious on Tuesday ahead of a crucial Federal Reserve announcement due out the next day. With investors waiting for signals from the central bank about the future of interest rates, the major U.S. equity averages posted modest losses for the second consecutive session.
Looking at the closing numbers, the Dow Jones finished the session at 32,653.20, a decline of 79.75 points on the day. The S&P 500 dropped 15.88 points to 3,856.10, while the Nasdaq retreated 97.30 points to 10,890.85.
It was a mixed day on the sector front. Six of the 11 S&P market segments recorded losses, led by weakness in Communication Services and Consumer Discretionary. Meanwhile, Utilities, Materials, Financials and Energy posted mild gains.
Noting low liquidity in the session before the Fed meeting, analyst Andrew Hecht wondered if “the inflation-fighting economists [at the Fed will] continue to wear their superhero Halloween costumes, or will they follow Canada and surprise the market with a toned-down 50 basis point hike?”
“The latest GDP data will likely encourage the fourth consecutive 75 basis point hike,” Hecht told Seeking Alpha. “Another 75 points may only promote a recession, as the bond market recently traded at the lowest level in over a decade.”
Given the upcoming Fed decision and next week’s mid-term elections in the U.S., Hecht concluded: “Fasten your seatbelts for a wild ride over the coming sessions.”
Going into this week, stocks had rallied off their yearly lows, fueled in part by hope that the Fed will downgrade its ultra-hawkish approach and slow the pace of interest rate increases. However, as Wednesday’s Fed meeting approaches, investors have trimmed those recent gains, basically treading water ahead of the announcement.
Currently, markets are pricing in an 88% chance that the central bank will raise interest rates by another 75 basis points on Wednesday, with a 12% probability that the Fed will only hike by 50 basis points. More than the rate increase itself, investors will be scrutinizing the Fed’s post-announcement commentary for signs about what they have planned for upcoming meetings.
Tuesday also saw investors digesting new data about the labor market. September job openings rose to 10.717M, up from 10.28M in the previous month and above the amount economists had predicted. This pointed to continued strength in the labor market, with the government’s monthly employment report slated to come out later this week.
Elsewhere, results were mixed in the bond market. The 10-year Treasury yield (US10Y) retreated, dipping about 2 basis points to 4.06%, after dropping as much as 16 basis points earlier. Meanwhile, the 2-year yield (US2Y) advanced nearly 5 basis points to 4.55%.
Looking at individual stocks, Uber rallied after its quarterly revenue surged 72% from last year and the company offered an upbeat forecast. Pfizer also gained ground following a strong earnings report.