Dow falls 240 points after no ‘rush’ from Fed official on 2024 rate cuts

What’s driving markets

Stocks are starting the week cautiously, weighing a fresh batch of corporate results from banks and downbeat manufacturing news. Now there’s a reminder that rate cuts may not be around the corner after all.

Federal Reserve governor Christopher Waller said Tuesday morning that the central bank will likely cut rates this year, but that it doesn’t have to be “rushed.” Stocks turned lower and bond yields popped higher.

Waller is considered more hawkish, and investors have paid attention when he previously said the economy could be slowing enough to address inflation.

Another policy pause is widely expected at the Fed’s January meeting, but there had been a 68% chance central bankers would carve the fed-funds rate down 25 basis points in their March meeting, according to the CME FedWatch tool. That inched lower to a 63% chance soon after Waller’s remarks.

“The market narrative had been as early as possibly March,” said Quincy Krosby, LPL Financial’s chief global strategist. Waller, who she said is viewed as a “pragmatic hawk,” and some others at the Fed now have a “seemingly orchestrated message to markets: Not so fast.”

The chance of a rate cut in March “is very much predicated on incoming data and also, by the way, where oil prices climb higher with regard to issues in the Middle East,” Krosby said.

Read also: No rate cuts in 2024? Why investors should think about the ‘unthinkable.’

At the same time, investors are getting data points on the economy’s next move as fourth-quarter earnings start to come in.

Companies reporting earnings Tuesday include Goldman Sachs
GS,
+0.72%,
Morgan Stanley
MS,
-4.20%
and PNC Financial Services
PNC,
+0.13%
before the opening bell rang on Wall Street, followed after the close by Interactive Brokers
IBKR,
-1.34%
and Pinnacle Financial Partners
PNFP,
-1.89%.

Those follows the Friday launch of earnings season with several big banks, including JPMorgan Chase & Co.
JPM,
-0.65%,
reporting

In commentary, BlackRock Investment Institute experts said earnings could be one of the difference makers for markets.

“We expect greater focus on earnings this year after consensus expectations rose through last year, with up to 11% growth now expected in the next 12 months, LSEG data show. The 2023 [fourth-quarter] earnings season should shed more light on how such expectations will evolve,” said the authors, led by Jean Boivin, head of the BlackRock Investment Institute.

Though companies have kept up profit margins, “we think they will normalize over time due to pressure from higher interest rates, ongoing wage gains and lower if still above-target inflation,” Boivin and others wrote.

“The concern for markets is how much pricing power do companies have at this point,” LPL’s Krosby said.

There was also U.S. manufacturing data to consider on Tuesday. The New York Fed’s factory index fell sharply from negative 14.5 in December to negative 43.7 this month, the lowest level since May 2020. The key is figuring how much, or how little, weight to put on the numbers, observers said.

Investors also have geopolitical ructions to consider. Heightened tension in the Middle East is raising fears that the disruption of shipping through the Red Sea may add to inflationary pressures. Nevertheless, oil futures moved lower Tuesday.

Companies in focus

• Morgan Stanley shares
  MS,
  -4.20%
  were 5.3% lower early Tuesday despite a beat on revenue in its fourth-quarter earnings. Revenue for the bank and broker grew by 1.2% to reach $12.9 billion, beating the FactSet forecast of $11.93 billion.

• Goldman Sachs Group Inc. shares
  GS,
  +0.72%
  were down 0.4% following a fourth-quarter revenue and profit beat from the investment bank. Revenue climbed to $11.32 billion, surpassing the $10.8 billion estimate. The earnings capped “year of execution” for the bank, according to Chief Executive David Solomon.

• The release of documents that support a recommendation by the U.S. Department of Health and Human Services to lower the classification of cannabis under federal law to Schedule III from Schedule I ignited a rally in cannabis stocks on Tuesday. Curaleaf Holdings Inc. 
  CURLF,
  +7.61%
  was up by 4.4%, Trulieve Cannabis Corp.
  TCNNF,
  +13.14%
   rallied 8.5% and Green Thumb Industries Inc.
  GTBIF,
  +5.66%
   rose 2.7%.

Jamie Chisholm contributed.