Fed rate cuts, Treasury yields, small caps: Market Takeaways

Major stock market indexes (^DJI, ^IXIC, ^GSPC) pulled back Wednesday, the sell-off fueled by March's Consumer Price Index (CPI) print as the Federal Reserve goes back and forth over how many interest rate cuts will be realistic in 2024.

Yahoo Finance Markets Reporter Josh Schafer joins Market Domination Overtime to talk about Wednesday's market-moving themes, particularly for Treasury yields (^DJI, ^IXIC, ^GSPC) and Russell 2000 small-cap stocks (^RUT).

For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.

This post was written by Luke Carberry Mogan.

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JOSH LIPTON: Josh Schafer is here with takeaways from the day. Joshua.

JOSH SCHAFER: Yeah, Josh. I mean, the big takeaway is the fact that we now have markets pricing out, one of the interest rate cuts that we had been expecting, right? So data from Bloomberg showing that pricing now in the markets has us at two rate cuts this year. That's down from three.

That's down from what was close to almost 7 at the beginning of January. So a very significant move. Perhaps notable as Julie was just pointing out when we were at the market close there.

We haven't seen a massive move downward in the S&P 500 amid that. And I think we can get into that a little bit as sort of why. But that's the big takeaway from this inflation reading is we're really starting to ratchet back our expectations for how many Fed rate cuts we're going to get this year. And now, I think the broader question for investors is just how much does it matter?

JULIE HYMAN: Well, it didn't matter that much to stocks today. It mattered some, right? We saw a sell off. But it wasn't a huge sell off. It mattered could argue a lot more for the Treasury market.

JOSH SCHAFER: It definitely did. We saw the Treasury market 10-year yield spiking 20 basis points at one point in the afternoon. I think it closed a little bit below that point that we had seen. But it was up to about 4.57.

Pretty massive move. It was interesting Wells Fargo's, Chris Harvey was on this morning. And he was talking about how the momentum market that we've talked about a lot in stocks. That applies to treasuries, too.

And when you see, you can have these big gaps filled. We talk about a gap fill maybe after earnings. And you see the candlestick go way up in a stock.

He said, you can see something similar in treasuries, too. And he expects that to happen. He noted, though, remember Chris Harvey is the one who came out yesterday and said-- or Monday and said 5535 for the S&P 500.

He said, the key level for him on treasuries is that 10-year yield at 5% for more than six months. So essentially saying we might get some volatility that might finally give us the real pullback that people have been waiting for in stocks, the actual pullback. But for it to really matter for equities, we'd have to be sitting at that level for an extended period of time.

JULIE HYMAN: That's interesting. It's not like it hits that threshold and all bets are off.

JOSH SCHAFER: Right. It needs to stay there, right?

JULIE HYMAN: Yeah, interesting.

JOSH LIPTON: Well, you know, Treasury yields, obviously, a key driver for mortgage rates. Lance Lambert I'm just seeing here. So housing guru, friend of the show.

Lance noting average 30 year fixed mortgage rate just jumped to 7.29%. Highest--

JOSH SCHAFER: Over seven.

JOSH LIPTON: Highest reading since November. So tough news for the housing market.

JULIE HYMAN: Not speaking personally, of course.

JOSH LIPTON: No, of course not. Of course, but a great reason I mean you're locked in at 3%. Are you moving for that? No?

JULIE HYMAN: No.

JOSH SCHAFER: No, it's probably freezes the market a little bit more, right?

JULIE HYMAN: Yeah definitely. And then there's something else that I talked about a little bit. Jared expanded a little bit. And that is large caps versus small caps.

And we've had a lot of people come on the show this year and say they like small caps. It's not paying off yet.

JOSH SCHAFER: Truly that was a trade to start the year. I mean, you couldn't talk. It felt like, at least for me, most of the strategists I spoke with you couldn't talk to someone who didn't at least mention the small caps were, quote, attractive.

JOSH LIPTON: A string of gaffes.

JOSH SCHAFER: Yeah.

JOSH LIPTON: That became a drumbeat.

JOSH SCHAFER: The valuation, it's got to be small caps. It's got to be small caps. But the key here-- the key to the small cap call was always Fed rate cuts, right? Remember when everyone was telling us that, we were looking at six rate cuts.

Now, you're looking at two rate cuts. It matters more to small cap companies who have more exposure to that debt. This is something that strategists have been flagging now and why you saw some strength maybe in that route, or I guess, I'll call it the bounce off the bottom today that we saw is people are just flowing to some of the large cap companies.

I mean, you look at the NASDAQ 100 today. NVIDIA up 2%. Amazon was in the green. Meadow was in the green.

These are companies with strong cash balance sheets that have good cash flow that are making money on the high interest rates on that cash, right? They haven't really been impacted by interest rates. And that's something that people are highlighting right now. Well, OK, small caps, maybe that's not going to work out. But could we have large caps support us? And maybe that's why we could still rally.

JULIE HYMAN: Well, and so much for the interest rates being high being a problem for NVIDIA. I guess AI. And for big cap tech, I guess, AI sort of inoculated those companies.

JOSH SCHAFER: At some point, if we haven't seen the effects of it, it gets hard to keep waiting for it. I think it's true. Yeah.

JOSH SCHAFER: Earnings are still improving.

JULIE HYMAN: Yeah, good point.

JOSH SCHAFER: Have to fight it.

JULIE HYMAN: Thank you. Appreciate it.