Wall Street in the Red. Is It the Witches’ Blame?

(Boursier.com) — Wall Street is down this Friday, the day after a powerful rally fueled by hopes of a rate cut and a soft economic landing. The Dow Jones, which gained 1.26% last night, is down 0.11% to 41,978 points today, consolidating at its peaks. The S&P 500, also at its highest level, is down 0.33% to 5,695 points. The Nasdaq is down 0.41% to 17,940 points, after a 2.5% jump last night.

The trend is therefore a little more cautious today, especially since it is the so-called “Four Witches” day, often marked by a certain volatility. On the Nymex, the barrel of WTI crude is losing ground below $71. The ounce of fine gold is up 1.1% at $2,615, exploring new highs. The dollar index is up 0.3% against a basket of reference currencies.

Yesterday, the indices had soared after digesting the announcements from Jerome Powell’s Fed. Thus, as expected, the Fed reduced its range on the ‘fed funds’ rate by half a point on Wednesday, between 4.75 and 5%. The move was expected, with around a 60% probability before the verdict, according to the CME FedWatch tool. This same barometer shows a probability of 62.4% of a new rate cut of a quarter of a point on November 7, at the end of the next monetary meeting. The meeting of December 17 and 18 could end with a range of 4-4.25% on rates (‘probability’ of 48.5% according to FedWatch) or 4.25-4.50% (probability of 35%).

Let us recall that the previous monetary tightening cycle lasted from March 17, 2022 to July 26, 2023, with an increase in rates from 0-0.25% to 5.25-5.5%. In the first quarter of 2022, the Fed was therefore still posting rates close to zero, and since July 2023, the rate level had not moved and operators had speculated considerably on the subsequent monetary easing, postponed many times due to the high level of inflation and a resilient economy. Rates had thus remained for more than a year at this restrictive level of 5.25-5.5%, a 23-year high.

Quoting…

This was therefore the Fed’s first rate cut since March 2020 and the Covid-19 period. The US central bank had reduced its rates by 50 basis points on March 3, 2020, between 1 and 1.25%, then by 100 basis points more on March 16, between 0 and 0.25%. Wednesday’s decision was almost unanimous among US central bankers, with one vote, that of Governor Michelle Bowman – the first dissent since 2005.

The question now is whether the US economy will have a soft landing or not. Fed chief Jerome Powell was keen to reassure by stating that this major rate cut, the first in over four years, was intended to maintain the strength of the economy. Powell therefore stressed the need to support activity, as inflation seems to want to return to its 2% target and the labour market is showing some signs of weakness. The Fed leader indicated that the upside risks to inflation were therefore lower, while the risks concerning the labour market would be greater.

Powell said the Fed was not behind schedule and that the adjustment that had been initiated would help maintain the strength of the economy and the labor market. “The time to support labor markets is when they are strong,” Powell said, suggesting that the weakness in the latest employment figures would not be cause for alarm. According to the leader, there would be no need to wait for labor markets to weaken further for inflation to return to target. Powell also specified that he did not see anything currently in the U.S. economy that suggests high risks of recession. This would therefore not be a panic rate cut, but rather a logical adjustment after a long period of contraction that had had its effects on prices.

The Fed is expected to continue this cycle of monetary easing, deciding meeting by meeting, but Powell said we should not expect a similar pace. In other words, the next rate cuts could therefore be more like a quarter of a point, although everything will depend on the data.

The Fed’s updated economic and monetary projections show that members expect 50 basis points of additional easing by the end of the year, then 100 basis points in 2025 and 50 more in 2026. The terminal rate would be 2.9%, compared with 2.8% expected in June, according to the “dot plot,” which shows Fed officials’ rate forecasts in a dot plot.

Also of note is that Philadelphia Fed President Patrick Harker will speak in the evening.

The markets were also following lower-than-expected weekly unemployment registrations yesterday, another reassuring element concerning the world’s leading economy… The adverse signals therefore do not necessarily come from statistics, but rather from company forecasts, such as those of FedEx last night, which confirm the slowdown already palpable when reading the rival’s latest accounts UPS.

Today’s session could be volatile, as it is the day of the Four Witches, with the simultaneous expiration of index options, stock options, and index or stock futures.

As for companies listed on Wall Street, Lennar And FedEx revealed their results after market close yesterday evening.

The values

Lennar (-4.5%), the American real estate developer, published for its third fiscal quarter ended in August revenues of 9.42 billion dollars, up 8% year-on-year, for adjusted earnings per share of 3.90 dollars, a very slight decline compared to last year. The consensus was close to 9.3 billion dollars in revenues and 3.6 dollars in earnings per share. Quarterly net income was 1.16 billion dollars, 4.26 dollars per share. The Miami group therefore easily beat the earnings consensus, with the strength of demand and limited supply, as well as the decline in mortgage rates. Fixed mortgage rates over 30 years have indeed fallen back to 6%, against a recent peak of 8%. Lennar now expects deliveries ranging from 22,500 to 23,000 units in the fourth fiscal quarter, against 21,516 in the third quarter.

FedEx (-15%) collapses on Wall Street. The group has indeed missed the profit consensus for the quarter ended and delivered very cautious forecasts for the 2025 financial year. Beyond the bad surprise concerning the delivery giant, this is also a less than encouraging signal regarding the more general state of the American economy. For the first fiscal quarter of 2025 ending at the end of August, the group announced revenues of $21.6 billion in GAAP and on an adjusted basis, compared to $21.7 billion a year earlier. Operating income represented $1.21 billion on an adjusted basis compared to $1.59 billion a year earlier. Net income was $0.79 billion, while adjusted net income represented $0.89 billion and $3.60 per share – compared to $1.16 billion or $4.55 per share a year earlier. Adjusted EPS is far from expectations, since the Bloomberg consensus was $4.77. Revenue is also disappointing, since the consensus was at $21.9 billion.

FedEx now expects full-year adjusted earnings per share of $20 to $21, compared with a consensus of $22. Bloomberg Intelligence analyst Lee Klaskow said “the sense of urgency is not there” to pay for extra charges for super-fast deliveries, which could mean “things are a little tight” and “people are trying to save money.” The parcel giant was hit by a pullback in priority services as customers opted for cheaper shipping options. CEO Raj Subramaniam called it a tough quarter. The company has been making significant efforts to cut costs, which only partially offset the headwinds. The Memphis-based company posted U.S. domestic shipping volumes down 3% in its express segment due to weaker business-to-business demand.

General Motors (-0.7%) is recalling 449,671 vehicles in the United States due to an inoperative brake fluid level warning, Reuters reported, citing the U.S. National Highway Traffic Safety Administration (NHTSA). Ford Motor (-1.7%) is recalling more than 144,000 2022-2024 Ford Maverick vehicles in the United States due to the rearview camera image freezing when the vehicle is in reverse, according to the same NHTSA.

Nike (+5.6%) jumps on Wall Street. The group has just announced the appointment of Elliott Hill as its new CEO and president, replacing John Donahoe who is bowing out next month. Hill will therefore return as CEO on October 14, after leaving the group in 2020. John Donahoe’s Nike’s recent performance has largely disappointed, and the stock has lost a quarter of its value this year. In the last published quarter, revenues fell by 2%, with management citing short-term challenges. Nike is currently implementing three-year initiatives aimed at reducing its costs by $2 billion.

Elliott Hill – unlike Donahoe who had headed eBay, Bain Capital or ServiceNow – is almost a “pure Nike product”. He joined the group straight after his studies in 1988 – the period of the famous slogan “Just do it”. After many roles within the group with the comma, Hill notably took over the head of Nike’s team sports division and the vice-presidency of global retail. Before leaving Nike in 2020, he was president of the Consumer & Marketplace segment for Nike and the Jordan brand.

Nvidia (-0.5%). UAE-based AI company G42 has teamed up with the US-based graphics and AI giant to create a climate tech lab. G42 says the two partners will work on AI solutions that would improve global weather forecasting. The lab and the alliance’s operational base will be in Abu Dhabi. The work is expected to be powered by Nvidia’s Earth-2 open platform. The climate tech lab will serve as a hub for research and development, reinforcing both companies’ commitment to environmental sustainability.