Stocks Narrowly Mixed Ahead of FOMC Decision

US stock indexes are exhibiting mixed performance as markets anticipate the conclusion of the FOMC meeting, where a 25 basis point rate cut is fully priced in, with investor focus now shifting to the Fed's 'dot plot' for future policy guidance. Contributing to market dynamics, Nvidia and other chipmakers are under pressure following reports of China's directive for companies to terminate orders for Nvidia's RTX Pro 6000D chip, while weaker-than-expected August housing starts and building permits also weighed on sentiment, providing some support for Treasury notes.

Analysis

The US stock market is exhibiting a mixed and tentative posture, with the Dow Jones Industrials posting a minor gain while the tech-heavy Nasdaq 100 is down, as investors await the outcome of the FOMC meeting. A 25 basis point rate cut is fully priced in, shifting the market's focus entirely to the Fed's forward guidance, specifically the 'dot plot,' to see if it aligns with market expectations of approximately 70 basis points in total cuts by year-end. Weighing on sentiment is a significant pullback in the semiconductor sector, led by Nvidia's more than 2% decline following a report that China has directed its major companies to cease ordering a key Nvidia chip. This geopolitical development has created a contagion effect, with other major chipmakers like Intel, Broadcom, and AMD also falling over 1%. Further dampening the mood, US August housing starts fell sharply by 8.5% m/m, and building permits dropped 3.7% to a 5.25-year low, both figures missing expectations and signaling a potential slowdown. In contrast, weekly MBA mortgage applications surged 29.7%, driven by a 57.7% jump in refinancing as the 20-year fixed mortgage rate fell to an 11-month low, indicating high consumer sensitivity to borrowing costs. This weak economic data provided a slight lift to 10-year T-notes, pushing the yield down 1.2 bp to 4.016%. On a micro level, company-specific news is driving significant divergence, with Roivant Sciences surging over 12% on positive clinical trial results and Workday gaining more than 8% on an analyst upgrade, while Manchester United and Uber Technologies are down on a poor outlook and insider selling, respectively.

Key Decisions for Investors

• Investors should prepare for potential market volatility post-FOMC, as the primary risk is a hawkish surprise in the Fed's 'dot plot' that diverges from the market's priced-in expectation of roughly 70 basis points in rate cuts by year-end.
• Re-evaluate exposure to the semiconductor sector, as China's directive targeting Nvidia's chips represents a significant escalation in geopolitical risk that could create sustained headwinds for the entire industry.
• Monitor weakness in housing construction data, which fell to a multi-year low, but note the surge in mortgage applications, suggesting that rate-sensitive consumer and real estate technology stocks like Zillow may be positioned to benefit from falling rates despite a builder slowdown.
• Focus on idiosyncratic factors, as demonstrated by significant gains in Roivant and Workday on company-specific news, suggesting that opportunities for alpha exist in firms with strong fundamental catalysts, even within a cautious market.