[New York Stock Market] Hawkish Comments Amid Higher-than-Expected PPI... Nasdaq Down 1.78%

[Asia Economy New York=Special Correspondent Joselgina] Major indices on the U.S. New York stock market closed lower on the 16th (local time) as the Producer Price Index (PPI) exceeded expectations, raising concerns about persistent high inflation. Hawkish remarks from Federal Reserve (Fed) officials leaving open the possibility of a big rate hike (a 0.5 percentage point increase in the benchmark interest rate) further dampened investor sentiment.

On the New York Stock Exchange (NYSE) that day, the Dow Jones Industrial Average fell 431.20 points (1.26%) from the previous session to close at 33,696.85. The large-cap S&P 500 index dropped 57.19 points (1.38%) to 4,090.41, and the tech-heavy Nasdaq index declined 214.76 points (1.78%) to 11,855.83.

All 11 sectors of the S&P 500 showed declines. Stocks sensitive to interest rates such as technology, communication, and discretionary consumer goods experienced notable drops. Microsoft (MS) and Disney each fell more than 2%, leading the Dow's decline. Tesla dropped 5.69% from the previous session amid controversy over retaliatory personnel moves and news of a recall of approximately 360,000 electric vehicles due to 'full self-driving' collision risks. Meta fell 2.66%, Amazon 2.98%, and Nvidia 3.35%. In contrast, Roku rose more than 11% after its sales exceeded expectations. Twilio also closed up 14.23% after surpassing sales forecasts.

[Image source=Reuters Yonhap News]

Investors closely watched economic indicators released that day, including the PPI and initial jobless claims, remarks from Fed officials, resulting monetary tightening outlooks, and corporate earnings announcements.

The PPI confirmed that wholesale prices in the U.S. have been under upward pressure since the start of the year. According to the U.S. Department of Labor, January's PPI rose 6.0% year-over-year and 0.7% month-over-month, both exceeding market expectations of 5.4% and 0.4%, respectively. Notably, the month-over-month increase was the largest since June last year. Kurt Rankin, chief economist at PNC, stated, "We are retreating in the fight against inflation," adding, "The rise in wholesale prices (PPI) means consumers will face price increases tomorrow." Peter Boockvar, chief investment officer at Bleakley Financial Group, said, "These indicators remind us that the fight against inflation is not easy," and "cost pressures have spread throughout the economy and will not disappear."

Following the earlier releases of January's Consumer Price Index (CPI), employment reports, and retail spending, these indicators suggest inflation may persist longer than expected, intensifying concerns over Fed tightening. Despite aggressive tightening since March last year, inflationary pressures have not eased as much as anticipated. Last week's (February 5?11) initial jobless claims, also released that day, fell below market expectations of 200,000, registering 194,000, a decrease of 1,000 from the previous week. Steve Chiavarone, chief portfolio manager at Federated Hermes, expressed concern, saying, "With the labor market this tight, achieving the 2% inflation target becomes more difficult."

Some speculate that the Fed may expand the rate hike to 0.5 percentage points again at the March Federal Open Market Committee (FOMC) meeting. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market currently prices in an 18% chance of a big step in March. While bets on a baby step (0.25 percentage point increase) still dominate, this is up from the 9% level just a week ago.

Loretta Mester, president of the Cleveland Federal Reserve Bank, also left open the possibility of a big step. In a speech that day, she said, "At the last FOMC, we saw a compelling case for a 0.5 percentage point increase, contrary to market expectations," adding, "It will take time to stabilize prices, and there will be pain involved." James Bullard, president of the St. Louis Fed and a prominent hawk within the Fed, also warned, "Inflation remains too high," signaling more aggressive tightening ahead. He stated, "I advocated for a 0.5 percentage point increase," and said he would not rule out a big step at the March FOMC. However, both Mester and Bullard do not have voting rights at this year's FOMC.

In the New York bond market, Treasury yields showed mixed movements. The benchmark 10-year Treasury yield hovered around 3.87%. The 2-year yield, sensitive to monetary policy, slightly declined to about 4.65%. The dollar index, which measures the dollar's value against six major currencies, edged up slightly to just above 104. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street's 'fear gauge,' rose more than 10% to the 20 level.

Market experts expect volatility to continue for some time. Mike Lowengart, head of portfolio construction at Morgan Stanley, analyzed, "The two inflation indicators released this week show that inflation remains sticky and the fight is not over," adding, "The decrease in initial jobless claims also means the labor market remains tight." He said, "It is not surprising that the market is taking a breather as hopes that the Fed will turn dovish within the next few months fade," concluding, "Investors are realizing that inflation will not return to normal levels as quickly as expected, and volatility will increase."

International oil prices fell for the third consecutive trading day. On the New York Mercantile Exchange, March delivery West Texas Intermediate (WTI) crude oil closed at $78.49 per barrel, down 10 cents (0.13%) from the previous session.