[New York Stock Market] Decline on Fed Hawkish Remarks... Nasdaq Down 2.26%, Treasury Yields Surge

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Seulgina Jo] Major indices on the U.S. New York Stock Exchange closed lower on the 5th (local time) as the Federal Reserve (Fed) second-in-command signaled a more aggressive tightening policy. After Lael Brainard, the Fed Vice Chair nominee known as a dovish figure within the Fed, made hawkish remarks emphasizing the need for faster interest rate hikes and quantitative tightening to reduce inflation, the market fluctuated and Treasury yields surged.

On this day, the Dow Jones Industrial Average closed at 34,641.18, down 280.80 points (0.80%) from the previous day. The large-cap S&P 500 index fell 57.52 points (1.26%) to 4,525.12, and the tech-heavy Nasdaq index dropped 328.39 points (2.26%) to 14,204.17. The small-cap Russell 2000 index declined by 49.40 points (2.36%).

By sector, a decline in technology stocks centered around semiconductor chips was confirmed. Tesla, a representative tech stock, closed down 4.73% compared to the previous session. Nvidia (-5.22%), AMD (-3.36%), Intel (-2.17%), and Amazon (-2.55%) also slipped.

Twitter’s stock price jumped more than 2% after announcing that Elon Musk, Tesla CEO and largest shareholder, would be appointed as a board member. Carnival’s stock rose 2.43% following news of a significant increase in cruise weekly bookings.

Investors closely watched the possibility of additional Western sanctions against Russia, movements in Treasury yields, remarks from Fed officials, and the minutes of the Federal Open Market Committee (FOMC) to be released the next day.

Lael Brainard, nominated as Fed Vice Chair, attended a conference and cited "inflation mitigation" as the central bank’s most important mission, stating, "We are ready to take stronger actions." This was interpreted as a signal that big steps of 0.5 percentage points in rate hikes could become more frequent. She also mentioned that the Fed could begin balance sheet reduction (quantitative tightening) as early as next month, explaining that it would be "much faster than the previous tightening period."

Following her remarks, the yield on the U.S. 10-year Treasury note surged to its highest level since May 2019. During the session, the 10-year yield rose to 2.567% before settling around 2.55%. This movement caused the 10-year yield to once again surpass the 2-year yield, which had recently inverted.

Pierre Beraet, an analyst at ActiveTrade, commented, "With tensions surrounding Russia, recession forecasts due to yield curve flattening, and the Fed’s sudden hawkish shift, investor attention remains divided, making it very difficult to read the overall environment." The FOMC minutes to be released on the 6th are expected to contain specific details that will clarify the Fed’s future pace and scope, linked to Vice Chair nominee Brainard’s remarks.

A report from Deutsche Bank, which predicted a U.S. recession next year, also drew investor attention. Deutsche Bank is the first major Wall Street bank to forecast a U.S. recession. Deutsche Bank economists stated, "The U.S. economy will suffer significant damage due to additional Fed tightening through late next year and early 2024."

Geopolitical risks surrounding Ukraine continued. The U.S., European Union, and Group of Seven (G7) countries are expected to unveil a new package of sanctions against Russia on the 6th.

Ursula von der Leyen, President of the European Commission, announced that the EU would impose a ban on Russian coal imports worth 4 billion euros annually (approximately 5.3265 trillion won). This is the EU’s first energy sanction measure. However, unanimous approval from all 27 EU member states is required. Phil Flynn, Senior Market Analyst at Price Futures Group, said, "The long-term focus in the energy market is on how quickly the EU will stop importing Russian coal, oil, and natural gas."

Despite concerns over additional sanctions, international oil prices fell. This was interpreted as a consequence of lockdown measures in Shanghai, China, due to the spread of COVID-19. On the New York Mercantile Exchange, May West Texas Intermediate (WTI) crude oil prices closed at $101.96 per barrel, down $1.32 (1.3%) from the previous session.

Natural gas prices rose. May natural gas futures closed at $6.032 per million BTU (British Thermal Units), up 32 cents (5.6%).