CNBC Daily Open: The Fed tries to cool the heat

Traders work on the floor of the New York Stock Exchange (NYSE) during morning trading on December 14, 2023, in New York City. © Provided by CNBC

What you need to know today

Triple witchingU.S. markets mostly rose Friday amid a tumultuous day of trading, which could have been triggered by an event known as “triple witching” — the simultaneous expiration of stock options, and stock index futures and options. Europe’s Stoxx 600 index ended the day flat, giving away earlier gains of around 0.5%. But it rose 0.91% last week, its fifth week of wins.

Cooling the heatFollowing the euphoria markets experienced after the U.S. Federal Reserve’s last meeting, during which it indicated three rate cuts for 2024, Fed officials seem to be dampening the enthusiasm. “We aren’t really talking about rate cuts right now,” New York Federal Reserve President John Williams told CNBC. “We need to be ready to move to tighten the policy further, if the progress of inflation were to stall.”

Citi works remotely

Citigroup employees were told they can work remotely in the final two weeks of December, CNBC has learned, making last week the final in-person experience of this year for many staffers. But this perk comes at a tense moment. Some employees expressed concern over whether their job will still exist next year as CEO Jane Fraser finalizes her sweeping corporate reorganization — one that’s already resulted in layoffs.

AI job losses

There are signs humans are losing jobs to artificial intelligence. According to a recent report from ResumeBuilder, 37% of respondents say AI has replaced workers this year, while 44% report AI will result in layoffs in 2024. But experts say this trend isn’t a wholesale replacement of humans — but a redefinition of the sort of jobs we can do.

[PRO] Focus on PCEIn comparison to last week, this week’s relatively light on economic data and market-moving events. But investors should keep an eye on the personal consumption expenditure index, out Friday. Economists expect the PCE to show inflation’s receding. But if it surprises to the upside, it’ll throw a wrench into the Fed’s plan to pivot — and possibly halt the ferocious market rally.

The bottom line

The “everything rally” spurred by Wednesday’s Federal Reserve meeting appears to have lost its legs — not least because the Fed itself seemed slightly spooked by how aggressively markets are pricing in rate cuts for next year.

According to the dot plot, which is a projection of where Fed officials expect interest rates to be in the future, there could be three 25-basis-point cuts next year. But markets think there’s a 34.7% chance rates will plummet to a range of 3.75% to 4% — that’s six 25-basis-point cuts — by December next year, according to the CME FedWatch Tool.

On Friday, New York Federal Reserve President John Williams tried to rein in some of that exuberance.

“I just think it’s just premature to be even thinking about that,” Williams said, when asked about futures pricing for a rate cut in March.

Williams even warned rates might go up.

“One thing we’ve learned even over the past year is that the data can move and in surprising ways, we need to be ready to move to tighten the policy further, if the progress of inflation were to stall or reverse.”

That could be one reason why markets were shaky Friday. The S&P 500 was essentially unchanged, the Dow Jones Industrial Average climbed 0.2% and the Nasdaq Composite added 0.4%.

That said, Friday also saw a quarterly event known as “triple witching,” the confluence of expiring stock index futures and options, as well as individual stock options. Furthermore, the S&P and Nasdaq-100 rebalanced their indexes, meaning the weight of some stocks on the index was changed. That could have exaggerated price moves and increased volatility as investors, accordingly, rebalanced their portfolios.

Finally, perhaps investors shouldn’t be surprised or disappointed the rally’s subsiding. “The market doesn’t go up every day, no matter how strong a trend is,” Chris Larkin, managing director of trading and investing at E-Trade points out. “Pullbacks and pauses are inevitable, regardless of how big they are or how long they last.”

The corollary to that is even a decline won’t last. Barring any shocks, signs are pointing to Santa spreading cheer in markets as the year wraps up.

Source: CNBC’s Yun Li contributed to this report.