[New York Stock Market] Dovish Interpretation of Fed Mentioning Inflation Slowdown... Tech Stocks Rally Including AMD

[Asia Economy New York=Special Correspondent Joselgina] Major indices of the U.S. New York stock market closed higher on the 1st (local time) as the central bank, the Federal Reserve (Fed), lowered the rate hike at this year's first Federal Open Market Committee (FOMC) meeting as expected. Investors interpreted Fed Chair Jerome Powell's press conference, which acknowledged the slowdown in inflation, as dovish (favoring monetary easing), leading to a notable rally in the Nasdaq index, which is particularly sensitive to interest rates and tech stocks.

At the New York Stock Exchange (NYSE) that day, the Dow Jones Industrial Average closed at 34,092.96, up 6.92 points (0.02%) from the previous session. The large-cap S&P 500 index rose 42.61 points (1.05%) to 4,119.21, and the Nasdaq index closed at 11,816.32, up 231.77 points (2.0%).

[Image source=Reuters Yonhap News]

All sectors in the S&P 500 except energy rose. The rally in tech stocks sensitive to interest rates was evident. Tesla closed up 4.73% from the previous session. AMD, which released strong earnings after the previous day's close, surged 12.63%, and Nvidia jumped 7.20%. Microsoft (+1.99%), Amazon (+1.96%), and Meta (+2.79%) also rose together. On the other hand, energy stocks were weak due to a decline in international oil prices. ExxonMobil fell 1.09%, and Chevron dropped 1.53%. Additionally, Peloton jumped 26.53% after reporting a reduced quarterly loss before the market opened. Baidu, listed on the New York Stock Exchange, rose more than 13% on news that BlackRock expanded its stake.

Investors closely watched the rate decision announced at the two-day FOMC meeting and Chair Powell's press conference. At this year's FOMC meeting, the Fed raised the federal funds rate by 0.25 percentage points from the previous 4.25-4.5% range to 4.5-4.75%. This followed the December FOMC meeting last year, where the rate hike was reduced to 0.5%, signaling a further slowdown in the pace of tightening.

In the press conference held immediately after the meeting, Chair Powell stated, "There will be no rate cuts this year," and "It may take longer than expected to bring down inflation." He added, "I believe several more hikes are needed to reach a sufficiently restrictive level," and "The labor market remains strong."

Despite Powell's remarks signaling additional rate hikes, the market viewed his tone as less hawkish (favoring monetary tightening) than expected. Powell publicly acknowledged that inflation is easing, saying, "Data over the past three months, including core PCE, is welcome news." He assessed that "we are in the early stages of disinflation." Regarding long-term inflation, he said, "It is trending downward and following the Fed's planned path."

When asked if there were changes to the rate outlook presented in the December dot plot, Powell said, "The year-end rate forecast was 5.0-5.25%, and it will be updated in March," adding, "Data until March is very important." He mentioned, "It is difficult to change course later if there is under-tightening, but there is no intention of over-tightening." Some on Wall Street interpreted Powell's public expression of concern about over-tightening itself as dovish. Contrary to Powell's statement that there will be no rate cuts this year, the market is placing weight on cuts within the year.

The 0.25 percentage point hike was already anticipated by the market. Signals that the cumulative tightening effects are taking hold have been confirmed in various recent indicators. The December personal consumption expenditures (PCE) price index, released before the FOMC, recorded the smallest increase in 15 months, confirming easing inflationary pressures. Additionally, the fourth-quarter employment cost index (ECI) released the previous day fell short of market expectations, somewhat alleviating concerns about wage inflation that the Fed has been monitoring.

Regarding discussions on when to pause rate hikes, Powell responded, "The minutes will be released within three weeks," adding, "I won't say everything. We spent a lot of time discussing the future path."

Ronald Temple, Lazard's chief market strategist, said, "There is a disconnect between the Fed and market expectations," evaluating that "The FOMC announcement suggests further rate hikes, while the market expects only one more." He also criticized the market for being too dovish regarding how long U.S. rates will remain at high levels. Chris Zaccarelli, Chief Investment Officer of Independent Advisor Alliance, also pointed out that even if the Fed pauses rate hikes, it could resume them.

In the New York bond market that day, Treasury yields fell. The two-year U.S. Treasury yield, sensitive to monetary policy, dropped to around 4.1%. The 10-year yield also fell to the 3.4% level. The inversion of the yield curve, where the long-term 10-year yield is below the short-term 2-year and 3-month yields, continues. This is generally considered a precursor to a recession.

The dollar index, which shows the value of the dollar against the currencies of six major countries, also fell more than 0.9% to around 101.1.

The indicators released that day were weaker than expected. According to the ADP National Employment Report, private sector employment in January increased by 106,000, falling short of market expectations. This is analyzed to partly reflect weather effects. Investors are currently awaiting the upcoming January nonfarm payroll report.

Corporate earnings announcements continue. Meta is scheduled to report earnings after the market close that day.

International oil prices fell sharply. On the New York Mercantile Exchange, the March delivery West Texas Intermediate (WTI) crude oil price closed at $76.41 per barrel, down $2.46 (3.12%) from the previous session. The ministerial monitoring committee (JMMC) meeting of the Organization of the Petroleum Exporting Countries Plus (OPEC+) oil-producing countries held that day concluded without any significant issues. Previously, the oil-producing countries had agreed at the October meeting last year to cut oil production by 2 million barrels per day until the end of this year.