Stocks Sink as Fed Signals Fewer Cuts 12/18/24

Summary

CNBC's "Fast Money" Podcast Summary: Stocks Sink as Fed Signals Fewer Cuts (12/18/24)

Release Date: December 18, 2024

Hosted by Melissa Lee and a panel of top traders, CNBC's "Fast Money" delves into the tumultuous market reactions following the Federal Reserve's recent decision to signal fewer rate cuts in the coming year. This episode provides an in-depth analysis of the economic indicators, sector performances, and expert insights shaping the investment landscape.

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1. Introduction and Market Overview

[01:01] Melissa Lee:
Melissa Lee opens the episode from the NASDAQ markets in Times Square, highlighting the significant market downturns triggered by the Fed's announcement. She outlines the day's key movements:

• Dow Jones Industrial Average: Down over 1,000 points, marking a 10-day losing streak—the longest since 1974.
• S&P 500: Declined nearly 3%.
• NASDAQ: Plunged more than 3.5%.
• Russell 2000 (Small Caps): Experienced their worst day since June 2022.

Lee also notes sharp declines in momentum stocks such as Tesla, MicroStrategy, Bitcoin, and Broadcom, raising concerns about a potentially turbulent close to the year.

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2. Federal Reserve's Rate Decision

[02:45] Steve Liesman:
Steve Liesman, Senior Economics Reporter, discusses the Fed's "hawkish pause," where the central bank reduced its benchmark lending rate by 25 basis points but signaled only two more potential rate cuts next year, down from the previously anticipated four.

[03:05] Dan Nathan:
Dan Nathan emphasizes the need for caution moving forward, suggesting that investors should look for signs of progress on inflation before adjusting their strategies.

[05:20] Steve Liesman:
Liesman elaborates on why the Fed's decision unsettled markets:

• Reduced Rate Cuts: From an expected four to just two in 2025.
• Inflation Forecasts: Increased expectations for inflation in 2025, partly due to potential fiscal policy changes under the incoming Trump administration.
• Market Doubts: The uncertainty around future cuts has caused investors to re-evaluate their strategies, particularly concerning the Fed Funds Futures contracts, which indicate low confidence in additional cuts.

[06:00] Karen Feineman:
Karen Feineman, a market analyst, expresses surprise at the ten-year Treasury yield's significant move, attributing it to higher-than-expected inflation concerns rather than pure Fed hawkishness.

[09:08] Steve Liesman:
Liesman comments on Fed Chair Powell's stance, noting that while the Fed remains committed to bringing inflation down to 2%, there's an implicit tolerance for inflation to run slightly above target before considering rate hikes.

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3. Market Reaction and Key Indicators

[04:48] Melissa Lee:
Lee questions whether the Fed's language indicates a prolonged pause or even the possibility of future rate hikes, given the mixed signals about economic performance.

[12:49] Melissa Lee:
Discussing the broader economic implications, Lee highlights the disconnect between elevated interest rates and the transmission mechanism's impact on the economy, suggesting that credit conditions remain too loose for the rates to be truly restrictive.

[14:21] Karen Feineman:
Feineman finds the pullback in banking stocks intriguing, citing the positive growth prospects in the banking sector despite the current downturn.

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4. Impact on Specific Sectors and Stocks

[03:13] Steve Liesman:
Liesman points out that the market isn't fully pricing in a second rate cut for 2025, as evidenced by the rising Fed Funds Futures contract trading around 4%, indicating uncertainty among investors.

[10:24] Melissa Lee:
Melissa Lee directs the conversation towards how the Fed's decision affects equity valuations and the broader market sentiment, hinting at potential prolonged market volatility.

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5. Guest Insights and Discussions

Federal Reserve Perspectives

[16:03] Loretta Mester:
Former Cleveland Fed President Loretta Mester provides her take on Powell's press conference, affirming that the Fed's actions were as expected. She emphasizes the Fed's commitment to balancing economic risks and maintaining appropriate fund rates to manage inflation.

[20:24] Melissa Lee:
Lee engages Loretta in a discussion about the Fed's communication strategies, particularly regarding the impact of higher rates on credit availability.

[40:38] Ben Emmons:
Ben Emmons of Fed Watch Advisors predicts that yields could retrace to around 5.3%, driven by the Fed's more hawkish stance and higher inflation forecasts. He maintains that despite rising yields, the overall economic environment remains strong, supporting equities.

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6. Government Shutdown Concerns

[27:21] Melissa Lee:
A developing story on Capitol Hill centers around President-Elect Trump, J.D. Vance, and Elon Musk opposing House Speaker Johnson's proposed three-month stopgap government funding bill. Concerns about a potential government shutdown escalate as Trump and Vance push for including disaster and farmer aid, as well as raising the debt limit.

[29:42] Melissa Lee:
Lee asks an honest question about market sensitivity to the ongoing political drama, with guest Courtney Garcia suggesting that the current Fed decision overshadows immediate shutdown concerns, although Friday's developments might have a bigger impact.

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7. Company Earnings: Micron and Lennar

[33:43] Melissa Lee:
Micron's shares tumble 13% in after-hours trading despite beating earnings estimates, due to weak Q2 guidance. CEO Sanjay Malhotra cites softness in mobile and PC sales, with smartphone unit growth slowing to mid-single digits in 2024 and low-single digits in 2025. Conversely, data center sales surged, but supply constraints remain an issue.

[31:48] Melissa Lee:
Lennar reports a challenging Q4, attributing poor performance to rising mortgage rates. Lennar's Chairman Stuart Miller notes that higher interest rates have limited affordability, leading to decreased new orders and deliveries.

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8. Merck's Obesity Pill Deal

[46:55] Melissa Lee:
Merck announces a $112 million upfront deal to acquire an experimental weight-loss pill from Chinese pharma company Hanso Pharma, with potential additional payments contingent on future milestones. The oral drug hasn't undergone human trials yet, causing uncertainty among investors.

[47:38] Melissa Lee:
Dan Nathan criticizes Apple's stagnant iPhone growth and questions the long-term prospects for Micron if major clients like Apple don't show significant renewal in demand.

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9. Final Trades and Sector Preferences

[48:21] Melissa Lee:
In the final trades segment, panelists share their investment preferences:

• Michael Kantopoulos: Favors small and mid-cap stocks over the next quarter, given the market sell-off.
• Karen Feineman: Continues to support banking stocks, specifically Wells Fargo.
• Dan Nathan: Advises avoiding utilities and certain generative AI trades due to overexposure and volatility.
• Courtney Garcia: Reiterates support for banks, emphasizing their role as beneficiaries of deregulation.

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Conclusion

The episode concludes with Melissa Lee summarizing the day's events, emphasizing the critical role of interest rates and fiscal policies in shaping market trajectories. As the year draws to a close amidst economic uncertainties and political tensions, investors are advised to navigate cautiously, balancing opportunities with the inherent risks highlighted throughout the discussion.

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Notable Quotes:

• Steve Liesman [02:45]: "Hawkish pause. I talked about that yesterday and the day before and nobody wanted to believe it."

• Loretta Mester [17:58]: "It's a subtle change of, you know, what's the base case going into a meeting and then what is the accumulated evidence tell you?"

• Ben Emmons [40:38]: "There's a lot of opportunity here for yields to go higher, I think given the Fed's change in tone and change in reaction function."

• Dan Nathan [35:57]: "Apple is one of their largest customers. Apple iPhones did not grow this year. They are basically flat."

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This comprehensive summary encapsulates the critical discussions and analyses presented in CNBC's "Fast Money" episode, offering listeners a clear understanding of the current economic climate and its implications for various market sectors.

Transcript

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[Melissa Lee]

Live from the NASDAQ markets out in the heart of New York City's Times Square, this is fast money. Here's what's on tap tonight. Stocks sell off and yields spike after the Fed signals fewer cuts are coming. The dow now down 10 days in a row. Small caps get whacked. The air coming out of the momentum names in a big way. Look at the moves in Tesla, MicroStrategy, Bitcoin, even the recently red hot Broadcom. Is this the start of a turbulent end to the year? Plus, Micron on the move after earnings Merck makes a deal in the obesity pill space and financials hit two month lows. The details behind all those moves. I'm Melissa Lee. Come to you live from Studio B at the Nasdaq. On the desk tonight, Karen Feineman, Dan Nathan, Courtney Garcia and Michael Kantopoulos, director of fixed income at Richard Bernstein Advisors. And we start off of course, with the Fed decision that sent markets reeling today. The Dow sinking more than a thousand points, logging its longest losing streak since 1974. The S&P down nearly 3% and the NASDAQ dropping more than three and a half. The small cap Russell 2000 leading the losses in the worst day since June of 2022. This after the central bank lowered its benchmark lending rate by 25 basis points and indicated there could be just two more rate cuts next year down from the previous forecast of four. The ten year yield topping four and a half percent for the first time since the end of May. Meantime, the dollar index closing at its highest level in more than two years, gold prices pulling back a third of a percent and the volatility index crossing above 23, the highest reading since August. And some wind coming out of the sales of top performers since the election. Bitcoin down over 5% while other momentum trades saw steep losses. Tesla for instance, down more than 8%. MicroStrategy sank 9 1/2 percent. For more on all this, let's bring in senior economics reporter Steve Liesman. Hawkish pause. Hawkish, Hawkish, yeah.

[Steve Liesman]

Hawkish pause. I talked about that yesterday and the day before and nobody wanted to believe it. The Federal Reserve cutting rates as expected by a quarter point to a new range of four and a quarter to four and a half percent but offered a more hawkish outlook on future rate cuts. That really spooked markets into doubting just how many more cuts could be on the way in 2025.

[Dan Nathan]

I think from this point forward, you know, it's appropriate to move cautiously and look for progress on inflation.

[Steve Liesman]

So how the Fed freak out markets? Well, the forecast only two cuts next year, not three as many in the market assumed. There was one descent but three others in the dot plot without a vote wanted no rate cut. Four banks that could be the same but are probably not the same did not ask for a discount rate cut. A sign of what their boards and maybe the president wanted and they raised their inflation for 24, 25 and 26. In addition, several Fed policymakers appear to have begun the process of incorporating potential fiscal policy changes into their forecast from the incoming Trump administration. That could explain why average inflation inflation forecasts went up for 2025 with specific concern about tariffs. Powell said those threats introduced uncertainty into the inflation outlook. Well, what happened to the probabilities January that is out, March in doubt, May getting more likely to get that next cut, June more solidly. But look at that December 2nd cut. The market has not really priced in a second rate cut for 2025. You can see that more clearly. But look at that doubt by the look at the December 2025 Fed Funds futures contract trading around 4% with a big rise today. It shows little conviction in that second cut that would send the funds rate below 4%. The situation could change if you get better inflation numbers or weaker unemployment data. That could make those cuts more likely and perhaps even Melissa, some clarity on what President elect Trump plans to do with tariffs. I would also offer about half of more than half of the post election Trump bump in equities is now gone.

[Melissa Lee]

That's a good point there. The situation could change, Steve, if inflation numbers come in better. They could also change if inflation numbers come in worse. And the moving to two seems like it's allowing themselves sort of the leeway to reevaluate. So I'm wondering if there is anything in the Fed's language because they also said the economy is performing very, very well using two verys in the press conference. I mean, all these things add up to me like there's the door open to a prolonged pause much longer or maybe even a hike possibility down the road.

[Steve Liesman]

I think that's right. I don't think. Well, look, it's important to point out that Powell also said the Fed is meaningfully restrictive still at this level. That tells you there is some tolerance for inflation remaining where it is or going a little higher before the Fed gets around to doing what you're talking about, Melissa, and hiking rates. There's some tolerance in there. Nobody really knows how much. But if the committee becomes convinced that inflation is no longer headed or it no longer has confidence that inflation or 2%, I believe they will hike rates. But the question becomes how and when they incorporate the incoming fiscal policies from the administration.

[Karen Feineman]

Steve, it's Karen. Thanks for being on today. I was a little surprised the magnitude of the ten year move in light of what I thought was somewhat clearly hawkish. Hawkish, hawkish from Powell, that, you know, since the ten year was sort of this tenure was reflecting concern about, you know, would we just have wild growth and inflation and that and that this I would think would maybe conversely have sort of this hawkishness would have actually given a little more support to the 10 year than I thought. Or is it just inflation could be high and that's what it's about?

[Steve Liesman]

I think that's part of it. You know, I'm informed a little bit by Scott Walter's interview with Jeff Gundlach who talked about the idea that you really can't make a strong bet on rates going down anymore. I think from let's call it the summer, maybe a little earlier through the fall you could say, all right, I'm going to take a position on rates coming down. And it was a pretty secure position. I'm not sure you could take that anymore. Where would you put rates? It may be that we're at the top end here in terms of where the 10 year is. I agree with you that it would think that given that hawkishness, the Fed was going to be leaning further and more strongly on inflation in the coming year than it otherwise had been. But I also think, you know, Melissa's question is not an idle one. She has her finger on the market as good as anybody. And if she's asking Steve, are rates going to possibly go up next year? Well, it must be a, a salient risk, I would say.

[Melissa Lee]

I don't know. Well, let's ask. Michael Kantopoulos is on the desk tonight, fortunately. What do you think? Because I mean, just yesterday or the day before, we were talking about T. Rowe Price, their head of fixed income, saying 6% next year. Yeah, I don't know if we'll get to 6% next year. I mean, maybe over the course of the next economic cycle. I guess if it's the start of a new economic cycle, then certainly we could get there. But listen, what world is the Fed restrictive? I just don't see how that could even be uttered with a straight face. I mean, they're looking at some hypothetical neutral rate, they're looking at the real Fed funds rate saying, oh, we're restrictive. But remember, the transmission mechanism of interest rates is to affect lending. Lending standards are easing, credit spreads are at all time tight. You got speculation in markets and Bitcoin, you know, banks are easing lending standards. There's plenty of liquidity out there. The effect of rates has not filtered through to the economy obviously. So I would argue that they're not restrictive. I agree with the sentiment about the ten year. You know, you would think that if you're going to tame long term inflation and growth expectations, the 10 year should stabilize, not go up. But I think this is much, you know, more to do with a knee jerk reaction than anything else. And I wouldn't take too much out of today's price action. I think we have to see how that plays out over the coming days before really understanding how the market takes this. Steve, I'm curious. When Powell was Talking about the 2% number, he said effectively that they're committed still to 2%, but it may take much longer than we were expecting, may take another year or so. Does that jive with what he said in the past or is that a longer time frame? Is that inflation fight going to be more traffic than we think?

[Steve Liesman]

I had the same thought when he said that. Is that showing us that he has more tolerance for inflation running above target than he previously did? I think the thinking here is that it's not broke in the extent that you have unemployment relatively low, relatively contained. The job market is a little bit looser and it's not, as he said several times, a threat to the inflation story here. And so I think what he's saying is at this point, given that growth has been pretty Good. Given that unemployment has been pretty well behaved, I'll take a little more time and not try to break it in terms of pressing further on the economy. I think that's what he's saying right there. But I think what was said by the previous guest there was really fascinating. This idea that the market doesn't necessarily believe that the Fed is restrictive here and therefore going to have a positive effect in terms of bringing down inflation. This is a big issue here, worth debating. If you think the Fed is restrictive and going to win this inflation battle, you can back bank on more rate cuts. If you don't think that, as the previous guest does not, then you cannot take that, that, that stand on more rate cuts coming next year.

[Melissa Lee]

Steve, thank you. Steve Lisman from Washington for us. So where do you stand on that point, Dan?

[Dan Nathan]

Yeah, well listen, he's the smart bond guy. I'll talk about the stock market. I'm kind of the dumb stock market guy too. So go back to late 21. I think we can all agree there was clearly a stock market bubble.

[Courtney Garcia]

Right.

[Dan Nathan]

And we had this crazy period of late 2021. Everything that wasn't bolted down was going up. Fed funds was basically on a zero interest rate bound. The 10 year was about 2% or so. So it was, you know, it was doing okay. Right. And so relative to fed funds, well, what happened when the Fed signaled that they're going to start raising interest rates, right. To battle inflation? These tech stocks got killed. Right. The Nasdaq went down 38% over the next year. Right. So I think about what's going on right now, if you are kind of taking off the table further cuts or you know, three, four like a lot of folks were kind of expecting in 2025, then you have to start thinking about valuations. You have to start thinking about this dollar that has gone from 100 to 108. That's the US dollar index, the Dixie. And you have to say to yourself, all these stocks that have pulled forward, so much performance, right. They're anticipating double digit earnings growth in 2025. Now they have serious headwinds. We were talking about that yesterday. Right. We're talking about the dollar. We are talking about where yields are and where they're likely to go with Yesterday we were 4.4, today we 2.5. If they go to 5%. If you don't think that the Nasdaq and the S and P have a down 20% move from here at some point, I think you're not doing this correctly. So to me I think facts that has about 15% expected EPS growth in 2025. If the dollar stays here, if yields stay here, that's not happening.

[Courtney Garcia]

I think the one thing we also have to think about is why rates might not be coming down. Right. Because I think it's interesting you're seeing this. Michael, you brought up a good point, a knee jerk reaction. I think that's exactly what you're seeing today because the bond markets have been pricing this in. I think we all knew that the Fed to have to either start pausing here or cutting less than they were expected to. But if they're not cutting because the economy is strong and prices are still stable, that's very different than them having to cut one or two more times next year because they need to save the economy. And if you're in that position where the economy can continue to grow, unemployment stays low at these higher rates. I don't think that's a problem for a lot of the equity markets in general. You're seeing this knee jerk reaction specifically on some of your rate sensitive sectors. So things like real estate, things like small cap are clearly playing off today. But inflation is going to be a concern next year. So you want to have those inflation hedges in there because that could be a problem but you want to make sure you balance that out.

[Melissa Lee]

So in that scenario that you laid out Courtney, does that mean that these dips in some of these high flaring names, I mean do you go in and buy big cap technology? I mean I think that's what. I don't want to boil it down so simply but I'm sure a lot of people home are thinking, you know What NASDAQ down 3%, 3 1/2 percent. Is this my chance to get into an Nvidia? Is this my chance to get into Bitcoin?

[Courtney Garcia]

I think what you have to look at too is even though this has had a dip, these are still doing so well since the beginning of the year. So when we look at our clients, most people are still are way overexposed to these. We've been trying to get people to take some profits off the table. Even with this debt, that's still the case. So is it buying up to. Probably. But most people, I was there so overexposed to it. So I think that's something you need.

[Melissa Lee]

To balance out without being a little bit cliche and sort of the tale to markets next year. I mean you could easily see a scenario where you go into next year, profit growth is reasonably strong. You know this, this rise in rates Ends up in the sell off in stocks, gets washed out because of the strong growth environment, all the promise of, you know, the fiscal policy that might be coming under Trump, etc. Only to see earnings growth start to slow as you get later into the second quarter, into third quarter and at the same time restrictive policy start to bite a little bit in that way. To Dan's point, it is very reminiscent of 2022. Just rather than runaway inflation, you have higher than average inflation. Instead of, you know, an earnings recession, you have slower earnings growth. Instead of a Fed that's hiking, you have a Fed that's pausing. All coming off of elevated equity levels and tight spread levels. That does not bode well, I think for back half of 2025. But near term I think the signaling is actually reasonably strong.

[Karen Feineman]

I think the pullback in banks is actually really interesting. I don't think that the environment for banks, the backdrop for banks, which I view is very positive. Yeah, right. I think you've got, you've got growth in loans because you. I do think the animal spirits are still there. I think you've got great potential for M and a good capital markets and they're not crazy expensive. And so this pullback I think is attractive. I would be adding, yeah, I just.

[Dan Nathan]

Had one other thing and I know we don't price in geopolitical risk, but if I look around the world, I cannot remember the last time there's been so much uncertainty. Look at what's going on in Canada, right near us. Look at what's going on in Germany. Look what's going on in France. Look at what's going on in Russia and Ukraine. Look what's going on in Syria and the Middle East. Look what's going on in China, in Taiwan. And that's not just the only point I want to make here. China's economy is a disaster. Okay. When you think about this, we have disinflation here and they're worried about a reflation. Right. Of that. But look at what's going on there. They might be like they might export deflation to all the points around the world that is not helpful to us one way or another. And if you think about this dollar, it's going to continue to go higher under that scenario. So I just think this is a really messy year. And then you think about what we learned about President Elect Trump's first admin. There's just going to be so much rhetoric that moves around. CEOs don't like that sort of uncertainty, especially when things are going great. Here, fine. If we have to worry about tariffs and then we have to worry about weakness all around the world in a strong dollar, that just doesn't set up for a great scenario that gets you to 15% year over year earnings growth, in my opinion.

[Melissa Lee]

For more on today's decision, let's bring in former Cleveland Fed President and CEO Loretta Mester. She's also a CNBC contributor. Loretta, great to see you.

[Loretta Mester]

Nice to see you.

[Melissa Lee]

What was your take of Jay Powell's press conference, his forward guidance specifically?

[Loretta Mester]

Yeah, I mean, I think it played out exactly as expected. I mean, I think coming into this it was clear that the Fed should be thinking about pausing. And I think he made it clear that that's what's on their mind. The dot plot showed half as much reductions last next year as the former dot plot did, which is exactly right. I thought something significant he said was that they have reduced the degree of restrictiveness quite a bit. And I think that's important because I think that's kind of where their mindset is. So you think about what they were doing since September's recalibration. Now, going forward, this is really about balancing those risks, making sure that they keep the funds rate at an appropriate place so that no matter how those uncertainties that you've just been talking about play out, they're in a good position to address them, either by holding at that current rate for much longer than anticipated or if things on the, on the employment part of the mandate weaken more than they expect, then bringing the rate down faster. So I think they're still in a good position here. I think the markets are reacting in a way that's kind of interesting because this was, I think, pretty well expected. But maybe it emphasizes that there is still a lot of uncertainty out there about the economy for next year, including what fiscal policy actions we're going to see.

[Karen Feineman]

Loretta, it's Karen. Thanks so much for being on given how hawkish he was and how he had statements like, you know, more cautious in the future, that sort of thing, and kind of the reluctance to even make this cut. Can you explain how did it happen that it actually did cut, even though the market seemed to be forcing them to not what goes on in the room that makes them come to this conclusion.

[Loretta Mester]

Yeah. So I think, you know, going into this meeting, I'm sure there are a lot of people who came in saying, you know, I could see it going either way. You come in sort of with your formulated view. They did nothing in the intermeeting period to really persuade people that a pause was likely to happen at this meeting and more importantly, why go forward with it? Well, the narrative surrounding the economy hasn't changed. If you look at the, the projections and what Chair Powell said at the press conference is they still expect inflation to come down toward 2% over their forecast horizon. It won't get all the way to 2%, but they expect it to be moving down. And they still expect right. The labor market to remain healthy. A tick up in the unemployment rate over time, but still a healthy labor market. It's just going to take a different policy path to get those outcomes. So it will take probably more restrictive policy, certainly more restrictive than they thought in September. And that would be the reason to keep to go. You could go forward with the rate cut of 25 basis point as long as you coupled it with the information that they gave us in the communication which was, look, from here on out, we're really going to be thinking about each meeting and looking at the, the, the cumulative information. So the way I think about it is over this period where they were recalibrating coming in to the meeting, it was has is the evidence start with a base case. We're going to be cutting and now what's the evidence that would sort of say go against that from now on? I think coming into the meeting is we're not cutting at this meeting. What's the evidence? What's the accumulated evidence that says okay, we can resume zoom those cuts. That's how I would be thinking about it now. So it's basically a subtle change of, you know, what's the base case going into a meeting and then what is the accumulated evidence tell you? Okay, is it time to resume? We can bring it down another notch because inflation has resumed coming down and we think it's on that path towards two or right. Is it now we still haven't seen the progress on inflation and so we're going to hold pat for another meeting. And that's how I think about it. So it's a subtle change in sort of what the base case is going into a meeting. The overall, you know, forecast remains the same, that eventually they'll be moving rates down because the economy is going to get back to 2% inflation.

[Melissa Lee]

Loretta? Mike. And topless here. I mentioned earlier that the transmission mechanism of, you know, higher federal funds rate is through credit channels. And what you ultimately want to do is either slow or speed up the availability of credit. And that's really sort of how interest rate policy works. So when you look at credit Channels out there, I'd still argue they're incredibly easy and actually getting easier bank, you know, lending standards, credit spreads, etc. So, you know, I know the Fed real Fed funds rate is elevated and I understand that we're above some theoretical neutral rate, but does anybody actually sit in the room and talk about the impact of higher rates and how it's affecting credit availability or is that just, you know, assume that it's going to at some point or another?

[Loretta Mester]

No, I mean, we, they talk about that in the room and certainly we did when I was there. We looked at, you know, the overall set of financial conditions and of course the Fed produces its own indices of these things. But you know, on the other side of that, if you think about how many people have and households have low rate, you know, fixed rate mortgages, right. That's, that's something that works against the transmission of lower rates into the economy. So again, you know, depends on what sector you're looking at, whether the transmission mechanism is, is the typical one or not. And I think the way the chair, you know, likes to put it is he looks at sort of what's happening on both sides of the mandate. And if you look at the employment part of the mandate, you have seen some moderation on the employment side. So that's, and you have seen inflation come down on the inflation part of the mandate. And so that would be an indication that policy is restrictive from the point of view of what the Fed controls. And therefore, you know, we're getting back to, you know, price stability and full employment. But I think the real key thing is there's risk around that. And one of the risks you're pointing out is that perhaps financial conditions aren't as tight. And that manifests itself today in looking at what the Fed participants think. The long run Fed funds rate, it's not exactly, you know, what a neutral rate would be at any point in time, but over the long run, the fed funds rate has moved up in those projections. And in fact, one thing I noticed in the ACP today, which I found very interesting, is that over the forecast Horizon, even by 2027, the Fed, the fed funds rate they're projecting is above, still restrictive relative to the long run Fed funds rate. That wasn't true in the September acp. So again, they are projecting that they're going to have to remain more restrictive than they thought and over the full forecast horizon.

[Melissa Lee]

Loretta, always great to get your take, especially on a day like today. Thank you.

[Loretta Mester]

Thanks, Melissa.

[Melissa Lee]

Happy sister, Happy holidays to you. So Karen, Your view of the markets for 2025 yesterday versus today has a changed.

[Karen Feineman]

No, not really. No. I mean, we're, we're back, I don't know, 10 days ago. Some things are down more.

[Melissa Lee]

No, no, but higher. I mean, this is, this is sort of like higher for longer.

[Karen Feineman]

I didn't, I was not thinking there would be many multiple cuts.

[Melissa Lee]

Oh, okay. So you weren't in that camp, I'm.

[Karen Feineman]

Sure the 10 year. Right. So I, you know, I think. Because I think we'll see inflation. So. No, nothing's really changed.

[Melissa Lee]

Yeah. How about you?

[Courtney Garcia]

Yeah, I'd agree with that. I mean, I think if you're, if you watch what's happening, the expectation was that the Fed was probably starting to get ahead of themselves and this was likely going to happen. So I don't think this should change your bigger picture. I think one thing it probably changes is the fact that all that cash that's sitting there, it's probably going to sit there longer because if people think, oh, I'm still going to get over 4% of my money markets, why do anything with it? So I think that part of the markets probably stays where it is. It doesn't start to funnel its way in. I don't think that's a bad thing for the markets. But that's one less catalyst upwards.

[Dan Nathan]

Yeah. So what changed for me is just like to see how quickly investors sold the faithful eight and that's really the most important point.

[Melissa Lee]

Which are the biggest eight stocks?

[Dan Nathan]

Oh, yeah, the trillion dollar. You haven't heard that yet, Michael?

[Melissa Lee]

I've heard it.

[Dan Nathan]

Okay, just coin.

[Melissa Lee]

No, but I'm a bond guy. I still hear the things, but I.

[Dan Nathan]

Think that's what's really important. And the other thing, and you know, I've been in this camp that I think that there's going to be this period next year where there's overcapacity and a lot of stuff that CapEx has been spending on. And I think just the fact that you're going to see a deceleration in the Capex. Microsoft's been telling you that the numbers in Microsoft have basically been notching lower a little bit. Satya Nadella and Dan Niles pointed this out was on Brad Gerstner's podcast last week. He said he is not constrained on chips anymore. What does that mean? It means their Capex is going lower. Okay, so he's constrained on power, but that's also been a bubble. So what's clear to me is that the generative AI bubble, there's some air coming out of it. It just depends how far you think it could go. And the only thing I'll just finish on is like we've seen a pull forward in a lot of the excitement about the activity that's going. That's been clear. I could have said that. I did say that two months ago, three months ago. But to me it's more about the narrative. And then if you get the narrative right, then you're not going to make a mistake at all. Time highs like a lot of folks have over the last call it month or so because that's the real danger here. If we were to have a sustained.

[Melissa Lee]

Sell off coming up, much more today is monster sell off. With 96% of S& P stocks ending the day in the red, is this an opportunity to buy or is there more pain to come? And we're watching some after hours action. Shares of Micron and Lennar on the move after reporting results. The details and numbers from the quarters next don't go anywhere. Fast money's back into.

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[Melissa Lee]

Welcome back to Fast money. A developing story in Washington where President Elect Trump along with J.D. vance and Elon Musk are taking shots at House Speaker Johnson's proposed three month stopgap government funding bill. Could this all lead to a shutdown? Emily Wilkins is pacing the halls on Capitol Hill to find out the latest. Emily?

[Emily Wilkins]

Hey Melissa. Well, it has been a very interesting day up here on Capitol Hill. We began with a 1500 page bill but not quite sure on the timing to vote on it. But now that bill itself is in jeopardy. All day long we've had Elon Musk and Vivek Ram Swamy raising concerns about the bill, urging lawmakers to vote no. And then Elon Musk coming out with tweets saying that those lawmakers who voted for this bill would be primaried and basically would be forced to give up their seats or lose them in an election. That seems to have made a lot of lawmakers here pretty nervous because we went from thinking that the stopgap would have a vote by the end of today to no more votes by the end of today. We've also seen reporting that says that leader Speaker Mike Johnson is actually looking at a slimmed down version. So instead of a bill that had a lot of provisions in it, a lot of spending in it, just one that focuses on funding the government past that December 20 deadline and then adding additional confusion and chaos to the mix. President elect Donald Trump and incoming Vice President JD Vance both tweeted that while they do want to see a stopgap bill, they want it to include disaster aid, currently at 100 billion. They do want it to include aid for farmers, currently at 10 billion. So they want some of the spending provisions. They have also called for that to include raising the debt limit. If you remember, Republicans had a big fight of this in 2020. They kind of kick the can down the road to January of 2025. And now Trump and Vance are saying that Republicans need to get it done. That is a very heavy lift. Usually negotiations over debt ceilings and debt limits, they can take weeks, they can take months. Last time it took half a year. And so to call for it with less than 72 hours on the clock before a government shutdown is really raising a lot of eyebrows here on Capitol Hill. And there's just a lot of uncertainty at this point about what, if anything, the House is going to be voting on and whether it can get support needed to actually cross the finish line. So we are monitoring the situation very closely and we'll continue giving updates as we have them.

[Melissa Lee]

Melissa Emily, thank You, Emily Wilkins, honest question here. Do the markets care about this now or will they care about it on Friday? What do you think?

[Courtney Garcia]

I mean, I think the Fed decision today is going to outweigh this. I think this news is going to go unnoticed. I do think, yeah, Friday this is going to be much bigger story.

[Melissa Lee]

All right, we've got an earnings alert on Lennar, the homebuilder down about, what is it, a couple percent now missing on the top and bottom lines. Diana Olek has the very latest. Diana, 6%. It was a rough Q4 for Lennar. They blamed it on mortgage rates and they're not wrong. The average on the 30 year fixed started September at a recent low close to 6%, but then shot up over 7%. And guess what? It jumped 21 basis points this afternoon to 7.13% after the Fed released that according to Mortgage News Daily, Lennar's new orders fell 3% year over year and were far short of guidance deliveries down 7%. Gross margin of 22.1%, a little shy of estimates now. Lennar Chairman Stuart Miller said in the release, in the course of our fourth quarter, the housing market that appeared to be improving as the Fed cut short term interest rates proved to be far more challenging as mortgage rates rose almost 100 basis points through the quarter. Even while demand remains strong and the chronic supply shortage continue to drive the market, our results were driven by affordability limitations from higher interest rates. He added that Lennar adjusted sales price incentives and margins in order to reignite sales and manage inventories. Melissa, conference call tomorrow or tonight. Dan, I'm just curious in light of the fact. Tomorrow. Tomorrow morning. Tomorrow. Okay. So there'll be a lot of questions to be asked about mortgage rates. Yes. Okay, Diana, thank you. Diana Olek, what do you think? I mean, obviously we could be in for a prolonged period of higher rates here. Yeah, yeah. Well, I mean, housing, remember, is a high multiplier industry. So any time you have higher rates that starts to affect the housing sector, that typically is not great for, you know, the rest of the economy. I think it's probably too soon to make that conclusion based on just today's price action or even this month's price action. But yeah, I mean, listen, a higher rate, higher for longer environment certainly is not good from that perspective. Yeah. How about for your Home Depot or Lowe's to sort of not great for that.

[Karen Feineman]

I was more thinking about Zillow, which also had a very difficult day. I mean, Zillow does have a rental business that. Which is help sort of somewhat as a ballast. But you know, this higher mortgage, this high, this quick is not great, right?

[Courtney Garcia]

Court the only interesting thing about higher rates in this industry, it means that there's less existing homes that are going to be sold, right? Because the average mortgage right now is 4%. So if rates are closer to 7, they're not selling. Which actually puts our homebuilders a little in a better position because of the supply demand constraints. So I don't know if it's as bad rates being high for them as it would have been in the past without that, without that situation.

[Melissa Lee]

All right, coming up, more after hours action. Shares of Micron on the move after reporting their latest results. The details in the quarter next. You're watching Fast Money live in the NASDAQ Marketsite in Times Square. Back right after this.

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[AT&T Business Representative]

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[Melissa Lee]

Welcome back to FAST Money. Micron shares tanking despite earnings that beat estimates, the chip maker issuing weak Q2 guidance. A conference call is underway. Seema Modi joins us with the latest. Seema.

[PGM Representative]

Melissa Micron remains challenged by weak mobile and PC sales. Smartphone unit volumes in 2024 are expected to grow in the mid single digit percentage range. And in 2025, CEO Sanjay Malhotra is expecting low single digit percentage growth as consumers pull back. Executives also add that autos remain soft with a shift towards value vehicles from premium and electric vehicles, which in turn has slowed memory and storage demand onto the bright spots. Though because data center sales for Micron did rise 400% in the quarter from a year ago, Micron more than doubled its high bandwidth memory revenue sequentially during the quarter. Demand is so strong that HBMs are sold out for calendar year 2025, which is part of the issue. How can it increase supply at a faster rate? Micron also revealing that its latest HBM will be designed into Nvidia's Blackwell GPUs. But shares are giving up gains down 13% here in after hours trade amid a broader tech rout. Chips not performing well today.

[Melissa Lee]

Melissa Seema. Thanks. Sima Modi. It sounds like it's the old, old lines of business, Dan.

[Dan Nathan]

It's not a statement on PCs, you know, and smartphones. And the one takeaway I would say really quickly and auto and industrial. Okay. And they're also telling you okay, about capacity constraint for memory that goes into the servers. Well, let's see, let's see if like Jensen Huang says that the Blackwell demand is insane because if it's not, then somebody like Micron is going to have a lot of problems here, especially with those other end markets that are, are very weak. And the one thing I'll just take away again, Apple is one of their largest customers. Apple iPhones did not grow this year. They are basically flat. There's an expectation that they're going to grow mid to high single digits next year. I don't think with some of the news that we heard that they're working on a foldable iPhone, they're working on a thin iPhone. Apple intelligence is a joke. I don't think it's going to be a big upgrade cycle until the fall, until they have these new phones. And then it goes back to the question with Apple's Multiple that's expanded 5 points based on no real growth, why is that happening? You know, I mean, so like at some point there will be a reset if you don't start to get some indication by some of their suppliers that things are going to be better than expected. And right now Micron's not telling you that.

[Melissa Lee]

I think J.P. morgan came out with a note today about Apple and how Apple intelligence isn't drawing people and that the 16 is actually tracking worse than the 15. So there's not traction gained off of this for an upgrade cycle.

[Courtney Garcia]

Yeah, and I remember I was talking about this back in the fall when the phone came out because it's kind of this carrot they're dangling where they say, oh, we're going to have AI. And then they came out with the phone and they said, oh, it's enabled, but the air is not going to.

[Melissa Lee]

Be on it until the spring.

[Courtney Garcia]

And now we just like don't know.

[Melissa Lee]

What it's going to happen.

[Courtney Garcia]

Yes, I think I agree with you. I think this is going to happen a lot later than we expected. And I don't know if it's this like super cycle upgrade people hoped for. Maybe down the line. We're not there yet.

[Karen Feineman]

So I agree with everything you both said. I wonder what you think, Dan, what is baked in. I think that when it was first released, I think the, I think there was not a lot of optimism that there would be a, you know, this wouldn't be huge certainly until at least they enabled some of the AI series, still the worst product imaginable. I think that the expectations are kind of muted for the 16 still. Even valuation is still rich. But I don't know, do you think that there's very bullish expectations?

[Dan Nathan]

I think expectations got really high almost immediately. The stock rallied right after WWDC on June 10th. For the next two days up 10%. It's a $3 trillion market cap company. And then it kept on going. It sold off and came back after that August, you know, early August, kind of swoon. I think the thing that makes me nervous like a bunch of these other fateful eight stocks over the last call it two weeks or so. I mean look at the move that Apple had. It went up 15% into today's all time high before it reversed. It's just dangerous behavior when that, when the fundamentals don't seem great. Although it's a much loved stock and you know, like so to me I just think that again we're seeing pull forward, pull forward, pull forward.

[Melissa Lee]

This is why, you know, liquidity is so important. I mean it's been a liquidity driven market more than anything else. And why today's Fed rate decision and what's going on, interest rates I think is really going to be a key driver of markets next year. Coming up, everything you need to know after today's massive sell off. The Dow now on its longest losing streak since Gerald Ford was in the White House. The impact on your money when Fast MONEY returns.

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[Dan Nathan]

We're back right after this.

[Melissa Lee]

Welcome back to FAST money. Another check on today's market sell off after the Fed signaled fewer rate cuts next year. The Dow plunging more than 1100 points. The S&P down nearly 3%. The NASDAQ falling more than three and a half percent. Financials getting hit hard. The XLF down nearly 3% with big banks all in the red. Charles Schwab continuing its decline. The broker down nearly 4%. Today and more than 10% since hitting a new 52 week high last Thursday. And some changes to the S&P 500H vac company Lenox International will join the benchmark index before starting a trading on Monday, replacing Biotech Catalynt, whose acquisition by Novo Nordisk closed today. Dan, you signaled, you flagged Schwab. You remember that on the call today she listened.

[Karen Feineman]

Is that what happened?

[Dan Nathan]

No, I just, I just figured it out when she asked me the question about Schwabisch. Yeah, I was just surprised when you think about the sort of retail interest in so many different of these names and the volume that we've seen and not just in equities, but in ETFs and options. So to me, futures, I wouldn't expect this thing to slow down anytime soon as far as volumes just because the stock market's down. But again, I just think the price action Schwab was kind of curious but it had a massive run into this.

[Melissa Lee]

Right. I mean to Karen's point on financials, not much has changed because of this Fed meeting. I mean the Fed underscored the point that the economy is very, very strong. Two varies in the description of the economy. Also Jay Powell highlighted the fact that the unemployment rate is the same level as July. I mean things are pretty steady as she goes here. And we have deregulation coming. So that, that thesis, if you believe in it, still exists.

[Courtney Garcia]

Yeah, and I think you hit the nail on the head when it comes to the deregulation because that was the big bump up we got post election on financials was due to the fact that they're one of the big beneficiaries of a deregulatory environment. And today they're getting hit on higher rates theoretically, but they're basically brought back to those pre election rate, pre election values at this point in time. So all that deregulation bump has basically been taken away. But that opportunity hasn't. So I think if anything it's a buying opportunity you want to take advantage of.

[Melissa Lee]

All right, let's get more on today's post Fed sell off with Ben Emmons of Fed Watch Advisors. Ben, great to have you with us. I quickly read through your note. You're quick on that draw in terms of getting this note out. But bottom line, you think yields are headed higher. Full retracement to 4, 7, 5. How high do you see it going in this environment, in this new environment now?

[Ben Emmons]

Yeah, Mel is Paul said, right. We're kind of shifted environment self. And you know, it was interesting to See that forecast come out because by showing a high inflation forecast and showing particularly in the back end, the members of the FOMC seeing upside surprise to the inflation outlook. I think that's what triggered the sell off today in the market, the peaking rates and that spilled over into the broader market. And yes, you're breaking four and a half years. We talked previously. So 475 is the high of this year. So that's an easy retracement. But to an early show from, from April, I believe it's 5.3. Right. It means that's really the upside there. And if I calculated that data rule really quickly on the forecast from the Fed today, that's actually what the Fed funds rate should be today, 5.3. We're about 80 basis points easier. So there's a lot of opportunity here for yields to go higher, I think given the Fed's change in tone and change in reaction function.

[Melissa Lee]

So how do you piece that environment for equities together for next year? If we are to say that rates could glide higher to above, you know, just above 5% or so. What we are also looking for, you know, the conditions for a stronger dollar, maybe slower earnings growth. I mean, how do you sort of put it together in terms of what the environment is for equities?

[Ben Emmons]

I don't think it will necessarily be a deteriorating environment because, you know, strong dollar, better growth, high yields. That still talks about that very, very good economy, as Paul said. And I don't think on that under that condition equities would actually sell off majorly. I think we have to just sort of digest ourselves to an environment where the Fed may not just simply be easing any longer. So that's, I think today's indigestion afforded outlook that I don't think changes anything other than if you're getting inflation really coming back meaningfully. So the Fed wants to get ahead of that inflation by being more focused on inflation that forecast. So I think it's a good backdrop, I think to Courtney's point of deregulation is a key element next year, including to the tax cuts that will continue to drive the sentiment. We just have to get used to a fact that's going to be likely on hold and show a little bit more like force on inflation. I think that's the only thing that could hold equities back then.

[Karen Feineman]

It's Karen, thanks for being on yesterday. There's a big piece Tiger T. Rowe price of 5 or 6% even 10 year and one of the things they cited was foreign Governments not participating as much. Do you see that happening and adding further pressure to the 10 year?

[Ben Emmons]

It's possible Karen, because you know there's a good point by T row. You know we talk oftentimes the Fed doesn't have only sorry, the US doesn't have a deficit problem, has actually a debt maturity problem and in other words which is financing too much with T bills. We've got to move that out the curve. That's still not really priced in. I think that's what keeps maybe these foreigners away but from the auctions deal analyzes because if that's the case we're moving higher yields. We've got to see those high yields first before the former foreigners come back. So I would agree with them. Not sure if 6% will be the end destination. It's more like above 4, 5% but that's reflective of an economy I think that emerge next year stronger towards more 5% growth. So that's good for equities but yeah, bond yields should be higher.

[Melissa Lee]

Ben, thanks for joining us. Appreciate it. Ben of Fed Watch, Michael, earlier you said you didn't see 6%, you saw 5, which is what Ben sees. I'm curious, did that number ratchet higher based on today or no, no, not really. You know this was pretty much our base case. We didn't think the Fed should have been cutting really at all so far this fall. So we sort of anticipated that they're probably going to have to slow down the pace of cuts and therefore it hasn't really affected our outlook too much. But yeah, so I think nothing's really changed.

[Dan Nathan]

Hey Michael, can Fed funds like what can the yield on the 10 year go to 6% and fed funds not go higher? Like meaning like can that happen in your mind? Because again you made the point, you know there was, I don't know T Rowe or somebody said that they think that it's going to 6% and just think back to like I don't six, nine months ago, I mean Rick Telly was on our desk, it was talking about 7%. Yeah, 710. You know we were hearing that Jamie Dimon said prepare for six, seven and so that's one of the biggest shifts that I think we've seen year over year. But can we see yields on the 10 year go much higher without the Fed starting to raise rates?

[Melissa Lee]

You know when you think about what the backdrop would be to get to a 6% 10 year it's probably one of pretty aggressive growth and inflation. Inflation. And in that world the Fed would try to slow it, they would probably get behind the curve similar to what we saw in 2022. They'd start slow, they wouldn't believe it, so on and so forth. So I think would be difficult.

[Dan Nathan]

But the stock market would hate that.

[Melissa Lee]

Stock market? Well, I think it depends on, I think it depends on how quickly you get there. If you got to 6% and it happened very fast, the stock market would hate it because of the volatility component. If you did it over the course of two or three years and it was gradual growth, then I think it's a very different answer for the stock market. And so I think how you get to that 6% level would really, would really matter. I do think we will see a 6% handle. I just don't think it's going to be likely this. Yeah, Exactly. Or in 2025. Coming up, Mark, supersize obesity bet. Why the pharma company is going all in on an experimental pill out of China and whether the move could help shares stage a turnaround. That is next. More fast. 20 into. Welcome back to Fast Money. Merck down nearly 2% after inking a deal to acquire an experimental weight loss pill from Chinese drug maker Hanso pharma. Merck paying $112 million upfront with the potential to tack on an additional 1.9 billion if certain milestones are reached. Importantly, the oral drug hasn't been put to the test in human trials yet. Smaller biotechs developing their own pills dropping sharply today turns Viking Structure Therapeutics. We talked to all of them during our obesity week. They're all down double digit in terms of losses today. And you know, the thinking is that Merck was probably one of the most likely big pharmas to acquire one of them. Merck licensed this deal with the Chinese pharma company. And so maybe it's out of the running in terms of doing an acquisition of these smaller plays. But what do we, how do we feel about pharma in this environment with health care sentiment so bad in general?

[Karen Feineman]

I feel like we've seen health care sentiment be so bad over election. Yes. Over election cycles where all the rhetoric and, you know, bipartisan and everybody hates it and all of that, and yet they still seem to rise. I mean, that's interesting about Merck. They can afford to sort of make some bets out there. I'd like to see the Gardasil situation improved. Yeah. I mean, that weighed on the stock heavily.

[Melissa Lee]

Yeah. But this really does show you. I mean, Merck is down 1.7%, which is, you know, not better than the overall markets in today's session that this is really the holy grail for those with pipeline challenges. This would be a tremendous opportunity. Absolutely.

[Courtney Garcia]

Yeah. And I think this is a much bigger deal for these smaller firms. Like for example like Viking Therapeutics are down 8% today versus the almost 2% the Merck was down. So I think it's a bigger deal for some of these companies where this is again, something post election. Everyone said, oh, we're going to see M and A, we're going to see more deal making. They're going to buy up some of these smaller firms. Now they're saying, okay, maybe that's not going to happen in the obesity space. And I don't know if that is the end of this or if, you know, they could do both. I think that's a question. So I think you're seeing a little bit of a knee jerk reaction here. But I do agree with Karen sentiment. I think it's so people are so negative on it and you know, kind of for reasons we don't really have any basis for at this point in time. But it could be an opportunity.

[Melissa Lee]

All right. Up next, final trades. Do not miss the reveal of CNBC Sports 75 most valuable college athletic programs tomorrow live on CNBC, cnbc.com sports sport starting at 6:00am Eastern Time. Time for the final trade. Let's go around the horn. Michael Kantopoulos of rba. Given the big sell off today and great relative earnings growth, I'm going with small and mid caps over the next quarter or so. Great to have you on the desk. Thanks for having you, Karen.

[Karen Feineman]

Feel like we went over this a couple of times on the show. I do like banks still financials. I like Wells Fargo.

[Melissa Lee]

Only been like 10 minutes since you like them before so it's still like you still like them.

[Dan Nathan]

Yeah. Utilities exclude down 10% percent over the last couple of weeks. I would not be buying this year. There's a couple of things that are wrapped up higher for longer and also this kind of generative trade. So I'd avoid.

[Melissa Lee]

Courtney.

[Courtney Garcia]

Yeah, I agree with Karen here. I would take a look at the banks think they were really hit on the Fed like the hawkish cut that we saw today. I think when it comes to deregulation, I think that's going to be a bigger story. So I would play that here.

[Melissa Lee]

Thank you for watching. Fast Mad Money starts right now. All opinions expressed by the Fast Money participants are solely their opinions and do not reflect the opinions of cnbc. NBC Universal, their parent company or affiliates and may have been previously disseminated by them on television, radio, Internet or another medium. You should not treat any opinion expressed on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of an opinion.

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[Melissa Lee]

Fast Money participants consider reliable, but neither CNBC nor its affiliates and or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such.

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