[New York Stock Market] Strong Employment and Hawkish Fed Raise Tightening Concerns... Nasdaq Down 1.47%

[Asia Economy New York=Special Correspondent Joselgina] Major indices on the U.S. New York Stock Exchange closed lower on the 5th (local time) due to stronger-than-expected employment data and tightening messages from the Federal Reserve (Fed). Despite consecutive interest rate hikes and recession concerns, the labor market overheating continued, further intensifying market fears of tightening. Hawkish remarks from Fed officials also poured in.

On this day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 339.69 points (1.02%) from the previous close to finish at 32,930.08. The S&P 500, focused on large-cap stocks, dropped 44.87 points (1.16%) to 3,808.10, and the tech-heavy Nasdaq index closed down 153.52 points (1.47%) at 13,05.24.

[Image source=Reuters Yonhap News]

By sector, all sectors within the S&P 500 declined except for energy stocks. The declines were particularly notable in interest rate-sensitive real estate, technology, and utilities sectors.

Among individual stocks, Bed Bath & Beyond (BBBY), a household goods retailer that gained attention as a ‘meme stock’ on Wall Street last year, announced it is considering bankruptcy filing and closed down 29.88% from the previous session. Silvergate, a bank serving cryptocurrency firms including FTX, plunged 42.73% amid large deposit withdrawals and hints at a possible sale. Tesla fell 2.90% following news that sales of electric vehicles manufactured in China dropped to the lowest level in five months.

Investors closely watched the private employment data and Fed officials’ remarks released ahead of the December employment report scheduled for the 6th. Private sector employment far exceeded market expectations, and the number of Americans filing for unemployment benefits hit a 14-week low, further strengthening concerns about Fed tightening.

According to the ADP National Employment Report, private sector employment in U.S. companies increased by 235,000 in December compared to the previous month, significantly surpassing the market forecast of 153,000. The wage growth rate in December was 7.3% year-over-year. The wage growth rate for private workers who changed jobs was recorded at 15.2%. On the same day, the U.S. Department of Labor reported that new unemployment claims last week decreased by 19,000 to 204,000, marking the lowest level in 14 weeks and well below the market expectation of 220,000.

These indicators suggesting that the labor market has not cooled down add momentum to Fed tightening. Especially for the Fed, which has been concerned about wage growth due to labor market overheating, the dilemma deepens. Continued high wage increases inevitably exert upward pressure on inflation. Mike Loewengart of Morgan Stanley Global said, "Private payrolls and unemployment claims exceeding expectations are signs that the labor market remains resilient," adding, "Although there is no doubt that market pressures are burdening companies following layoffs by large firms, it remains to be seen whether employment data will noticeably slow down."

Hawkish remarks from Fed officials also poured in. The day before, the Fed reaffirmed its tightening commitment through the minutes of the December Federal Open Market Committee (FOMC) meeting, stating it would maintain a higher level of the benchmark interest rate until inflation is firmly controlled. This effectively dashed market hopes for a pivot (direction change) within the year.

Esther George, President of the Federal Reserve Bank of Kansas City, said in an interview with CNBC that the terminal rate would exceed 5% and the Fed would maintain this level for some time. She, who is retiring this month, also mentioned that high rates are likely to continue in 2024, saying, "I think so." While she does not predict a recession, she acknowledged the possibility.

James Bullard, President of the Federal Reserve Bank of St. Louis and a prominent hawk within the Fed, also forecasted additional tightening, stating that the current monetary policy is not sufficiently restrictive. Bullard said, "Inflation remains generally too high but is slowing recently," adding, "We are approaching a restrictive policy and will reach that level this year." Raphael Bostic, President of the Federal Reserve Bank of Atlanta, emphasized at a conference that "inflation is the biggest headwind facing the U.S. economy" and stressed "a firm commitment to achieving the 2% target."

In the New York bond market, a rise in Treasury yields was confirmed. The Fed’s consecutive hawkish messages, combined with the solid employment data released that day, reinforced tightening, causing Treasury prices to fall and yields to rise. Treasury yields and prices move inversely. The 10-year Treasury yield rose to around 3.72%. The 2-year yield, sensitive to monetary policy, jumped to about 4.49% intraday before slightly narrowing its gains.

The dollar index, which measures the value of the U.S. dollar against six major currencies, rose about 0.9% to the 105 level. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street’s ‘fear gauge,’ increased more than 2% from the previous close and hovered around the 22 level.

Now, investors’ attention is focused on the December employment report from the U.S. Department of Labor to be released the next day. Investors are expected to seek further hints about future monetary policy through this report. Currently, the consensus for nonfarm payrolls on Wall Street is an increase of 200,000, slightly down from 263,000 in the previous month. The unemployment rate is forecasted to remain steady at 3.7%, the same as the previous month. Average hourly earnings are expected to rise 5% year-over-year and 0.4% month-over-month.

CNBC reported, "A larger number showing the labor market remains strong would be bad news for the Fed," adding, "Investors do not want to see wage growth that could signal high inflation."

Accordingly, there are expectations that uncertainty in the stock market will increase until the February FOMC meeting. Stephan Ines of SPI Asset Management predicted, "Until the Fed announcement, investors may maintain a relatively defensive stance and reduce their bond and stock allocations."

International oil prices rebounded on this day. On the New York Mercantile Exchange, the price of West Texas Intermediate (WTI) crude oil for February delivery closed at $73.67 per barrel, up 83 cents (1.14%) from the previous session. This is analyzed as a result of bargain hunting, judging that the recent price decline was excessive.