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On Tuesday, the stock market faced a downward trend as bond yields fluctuated in anticipation of tomorrow's Federal Reserve interest-rate decision. This had a significant impact on various indices. The Dow Jones Industrial Average dropped 200 points, representing a 0.5% decline. The S&P 500 also saw a 0.5% decrease, while the Nasdaq Composite was down 0.4%. According to Dow Jones Market Data, the Dow was on course for a 9-day losing streak, which would be the longest such streak since 1978.

Market Breadth and Its Implications

The S&P 500 was on track to close with negative breadth for the 12th consecutive day. Looking back at available data since Dec. 31, 1999, its longest streak of negative breadth was 10 days in 2000. This indicates a certain pattern and potential challenges in the market. The movement of bond yields played a crucial role in shaping these trends. The yield on the 2-year Treasury note rose to 4.266%, and the 10-year yield initially jumped to 4.429% before pulling back to around 4.4%. These increases were triggered by hot U.K. wage data and a note from T. Rowe Price CIO ARif Husain, who warned that the 10-year yield could top 5% in response to some of President-elect Donald Trump's proposed tax and tariff policies.

U.S. Retail Sales: A Positive Surprise

U.S. retail sales showed a notable increase in November, exceeding expectations. Chris Larkin, managing director of trading and investing at E*TRADE from Morgan Stanley, noted that this was in line with one of the primary themes of 2024 - the economy continuing to surprise on the upside. Despite this, the Fed is still on track to cut rates tomorrow. However, more strong economic data could make it more likely for them to pause in January. This highlights the delicate balance between economic growth and monetary policy.

Bond Market Expectations and Forecasts

Andrew Brenner, head of international fixed income at NatAlliance Securities, believes that the bond market is preparing for the rate cut to be accompanied by more hawkish forecasts for 2025. He writes that the base case for January is a pause, as Powell wants to take rates lower but is facing pushback from his colleagues on the Fed. He also considers the possibility of a weak December employment report prompting another quarter-point cut in January, while a similar number to November's nonfarm payrolls would lead to a pause. In the meantime, the bond market is anticipating significant movements this week before things settle down during the holidays.