Wall Street drops as retail sales data crimps rate cut bets

By Noel Randewich and Johann M Cherian

(Reuters) - Wall Street stocks fell sharply on Wednesday after upbeat December U.S. retail sales data eroded expectations the Federal Reserve will kick off its rate-cut campaign as early as March.

The benchmark S&P 500 fell to an over one-week low, while the blue-chip Dow dropped to a near one-month low.

Megacap stocks weighed on the market, with Amazon, Nvidia and Alphabet each down more than 1% as the 10-year Treasury yield rose to over 4.1% - its highest this year. [US/]

Tesla dropped 3.4% after the electric-vehicle maker slashed prices of its Model Y cars in Germany, a week after reducing prices for some China models.

The interest rate-sensitive S&P 500 real estate sector index tumbled 2.7% to a one-month low.

Data showed discounts from retailers and increased motor-vehicle purchases supported a higher-than-expected rise in U.S. retail sales, keeping the economy on a solid footing in 2024.

That reinforced the view that the Fed may not cut rates as quickly as previously expected this year.

Traders' expectations of a 25-basis-point Fed rate in March dipped to 55%, from around 60% before the data was released.

U.S. stocks in recent weeks have relinquished some gains from a strong final two months of 2023.

"People's positions are moderating from 'all positive' to 'there's still a lot of uncertainty out there,'" said Tom Martin, senior portfolio manager at Globalt Investments in Atlanta.

He cited Fed officials who have recently downplayed expectations of a quick start to rate cuts, and mixed economic data.

The CBOE Market Volatility Index, a market fear gauge, rose to an over two-month high of 15.37 points during the day.

The S&P 500 remains down about 1% from its record high close in January 2022.

U.S. economic activity was little changed from December through early January, while firms reported pricing pressures were mixed and nearly all cited signs of a cooling labor market, the Fed said in its "Beige Book" report on Wednesday.

Morgan Stanley fell 2.2% after analysts cut their ratings and price targets in the wake of the bank's fourth-quarter earnings. Bank of America and Citigroup each lost over 1%.

The S&P 500 was down 0.91% at 4,722.52 points.

The Nasdaq Composite Index declined 1.16% to 14,771.72 points, while the Dow Jones Industrial Average was down 0.48% at 37,180.48 points.

The small-cap Russell 2000 index dropped 1.3% to a one-month low.

Charles Schwab dropped 1.2% after its fourth-quarter profit fell 47%.

Spirit Airlines nosedived 24%, extending steep losses on Tuesday after a U.S. judge blocked JetBlue from acquiring the carrier.

Ford Motor lost 2.3% after UBS downgraded the stock to "neutral" from "buy."

Boeing gained 1.1% after the Federal Aviation Administration said inspections of an initial group of 737 MAX 9 airplanes had been completed.

Declining stocks outnumbered rising ones within the S&P 500 by a 5.5-to-one ratio.

The S&P 500 posted 23 new highs and five new lows; the Nasdaq recorded 41 new highs and 199 new lows.

(This story has been corrected to state the conclusions from Beige Book are through early January, not mid-November, in paragraph 14)

(Reporting by Noel Randewich in Oakland, Calif., and by Johann M Cherian and Ankika Biswas in Bengaluru; Editing by Pooja Desai and Richard Chang)