[New York Stock Market] Strong Indicators Raise Tightening Concerns... Nasdaq Down 1.93%

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] Major indices on the U.S. New York stock market closed lower on the 5th (local time) amid concerns that the Federal Reserve's tightening measures could intensify due to strong employment data. Government bond yields rose, and the U.S. dollar also showed strength.

On the New York Stock Exchange (NYSE) that day, the Dow Jones Industrial Average closed at 33,947.10, down 482.78 points (1.40%) from the previous session. The S&P 500, which focuses on large-cap stocks, fell 72.86 points (1.79%) to 3,998.84, and the tech-heavy Nasdaq dropped 221.56 points (1.93%) to 11,239.94.

All 11 sectors listed on the S&P 500 showed declines. The weakness was particularly notable in interest rate-sensitive sectors such as technology, materials, industrials, and energy.

Tesla closed down 6.37% following reports of production cuts at its Shanghai plant. However, Tesla China has officially denied these reports. Other tech stocks like Microsoft (-1.89%), Amazon (-3.31%), and Netflix (-2.44%) also retreated amid concerns over slowing growth.

VF Corporation, which owns brands such as Timberland and The North Face, fell 11.17% after lowering its sales outlook for the second half of the year and announcing the retirement of its CEO. Energy stocks like ExxonMobil (-2.74%) and Chevron (-2.47%) also declined due to falling international oil prices.

Investors digested the November employment report released late last week while trying to gauge the Federal Reserve's upcoming interest rate decision scheduled for next week. The November employment report, which was stronger than market expectations, has somewhat diminished hopes for easing Fed tightening. Attention was also focused on economic indicators and movements in government bond yields.

The market expects the Fed to take a big step by raising interest rates by 0.5 percentage points at the December FOMC meeting. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market currently reflects more than a 79% chance of a big step in December. This is a more moderate pace compared to the previous four consecutive giant steps (0.75 percentage point hikes).

However, given the still-strong labor market, there are growing expectations that the Fed will maintain high interest rates for an extended period and adopt a more hawkish stance. Last week, Fed Chair Jerome Powell confirmed that instead of slowing the pace, the 'terminal rate' could be higher than the level suggested in September. CNBC reported, "This could mean the federal funds rate surpassing 5%, and investors are weighing the possibility that the Fed will continue raising rates until a recession occurs." On the 13th, the November Consumer Price Index (CPI), which will reveal whether inflation is easing, will also be released.

As concerns over tightening resurfaced, government bond yields rose in the New York bond market that day. The yield on the U.S. 2-year Treasury, sensitive to monetary policy, rose to 4.392%, and the 10-year yield climbed to 3.598%. Rising bond yields indicate falling prices for safe-haven government bonds. The inversion of the yield curve, where long-term 10-year yields exceed short-term 2-year and 3-month yields, continues. This phenomenon is generally considered a precursor to a recession.

Michael Darda, Chief Economist at MKM Partners, pointed out that as this inversion deepens, the likelihood of a soft landing for the economy is decreasing. In an interview with CNBC, he said, "As Jerome Powell mentioned, the path to a soft landing is becoming narrower," citing the widening spread of the inverted yield curve as one of the main reasons.

The dollar showed strength. The Dollar Index, which measures the value of the U.S. dollar against major currencies, rose more than 0.7% to reach the 105 level. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street's 'fear gauge,' jumped more than 8% from the previous session.

The economic indicators released that day were mixed. According to S&P Global, the final U.S. November Services Purchasing Managers' Index (PMI) was 46.2, down from 47.8 the previous month, indicating contraction in business conditions. It remained below the baseline of 50 for five consecutive months, signaling ongoing contraction. The composite PMI, including manufacturing, was also below 50 at 46.4 in November.

On the other hand, the ISM U.S. Services PMI stood at 56.5, exceeding both the expansion-contraction threshold of 50 and Wall Street's forecast of 53.7. U.S. October factory orders also rose 1% month-over-month, surpassing the expected 0.7% increase.

Currently, investors are also paying attention to whether a December Santa Rally will occur. Typically, year-end factors such as corporate bonuses and holiday shopping seasons boost consumption and can drive stock prices higher. However, experts point out that the key to a Santa Rally ultimately depends on the Fed's actions.

Some even suggest that the New York stock market may test its lows early next year. Jeff Kleintop, Chief Global Investment Strategist at Charles Schwab, said, "A shallow recession may have already begun," and predicted that the market will perform worse in the first half of next year than in the second half. Hedge fund manager Dan Niles diagnosed that the market has entered another bear market rally and that investor sentiment could freeze again in the new year.

International oil prices fell due to the strong dollar and other factors. On the New York Mercantile Exchange, January WTI (West Texas Intermediate) crude oil prices closed at $76.93 per barrel, down $3.05 (3.81%) from the previous session. This is the lowest closing price since the 25th.

As a result, the market appears more concerned about Fed rate hikes than Western bans on Russian oil. John Kilduff, Partner at Again Capital, said, "Fear of the Fed has once again seeped into the market."