[New York Stock Market] Falls Over 2% Amid Tightening Concerns... Sharp Rise in Government Bond Yields

[Asia Economy New York=Special Correspondent Joselgina] On the 21st (local time), the U.S. New York stock market closed down over 2% across the board, as investors focused on concerns over the prolonged tightening by the Federal Reserve (Fed) and weak corporate earnings guidance. Treasury yields surged across the board.

At the New York Stock Exchange (NYSE) on this day, the Dow Jones Industrial Average closed at 33,129.59, down 697.10 points (2.06%) from the previous session. The large-cap S&P 500 index fell 81.75 points (2.0%) to 3,997.34, and the tech-heavy Nasdaq index dropped 294.97 points (2.50%) to 11,492.30. The market was closed on the 20th for Presidents' Day.

All 11 sectors within the S&P 500 declined. Consumer discretionary, technology, industrials, and financial stocks all fell more than 2%. Representative tech stock Tesla closed down 5.25% from the previous session. Microsoft (-2.09%), Apple (-2.66%), Amazon (-2.70%), and Nvidia (-3.43%) also retreated in unison. Home Depot fell more than 7% after issuing earnings guidance indicating that sales would barely increase in fiscal year 2023. On the other hand, HSBC Holdings rose 4.55% on earnings that exceeded market expectations. Additionally, major Chinese tech stocks listed in the U.S. also slid. JD.com and Pinduoduo dropped 11.03% and 9.54%, respectively. Alibaba also fell nearly 5%.

[Image source=Reuters Yonhap News]

Investors are closely watching the Fed's tightening concerns ahead of the release of the February Federal Open Market Committee (FOMC) minutes the next day. The growing concern that the Fed will maintain high interest rates for a longer period put pressure on both the stock market and Treasury prices. In the New York bond market, the 10-year U.S. Treasury yield rose to the 3.9% range. The 2-year yield, sensitive to monetary policy, also jumped to the 4.7% range. Treasury prices and yields move inversely.

According to the Chicago Mercantile Exchange (CME) FedWatch, the current federal funds (FF) futures market is betting on the possibility that the Fed will raise rates by more than 0.75 percentage points by July. Just last month, it was expected that the tightening cycle would end after two baby steps (0.25 percentage point hikes each), totaling a 0.5 percentage point increase, but the possibility of additional tightening has gained traction.

Mike Wilson, U.S. equity strategist at Morgan Stanley, appeared on CNBC's Squawk Box and said, "There will be at least two or three more rate hikes by June," adding that the combination of strong inflation and the labor market is negative for the stock market. Jeffrey Buchbinder of LPL Financial said, "The possibility of a 0.5 percentage point hike at the March meeting has slightly increased," and assessed that "the market has started to listen to the Fed."

This week, the January Personal Consumption Expenditures (PCE), the Fed's preferred inflation gauge, will also be released. Additionally, speeches are scheduled from Fed's third-ranking officials including John Williams, President of the New York Federal Reserve Bank; Raphael Bostic, President of the Atlanta Fed; Philip Jefferson, Fed Board member; and James Bullard, President of the St. Louis Fed, making their inflation and economic outlooks worth monitoring. Revised GDP growth figures for Q4 of last year, which provide insight into the economic situation, will also be released.

The S&P Global Manufacturing Purchasing Managers' Index (PMI) for February, released on this day, rose to 50.2 from 46.8 the previous month, returning to expansion territory. A reading above the baseline of 50 indicates economic expansion. This is also the highest level in eight months. John Stoltzfus, Chief Investment Strategist at Oppenheimer, said, "Investors have a lot to consider this week," adding that economic indicators will provide hints to assess the health of the U.S. economy.

Earnings guidance from retail companies also contributed to the day's market decline. Walmart and Home Depot, which released earnings before the market opened, attracted investor attention as indicators of U.S. consumer outlook.

Walmart's adjusted earnings per share (EPS) for Q4 last year was $1.71, exceeding the market consensus of $1.51. Sales also surpassed Wall Street consensus, reaching $164.05 billion compared to the expected $159.72 billion. However, Walmart showed caution regarding its outlook for this year, considering that rising grocery prices and other factors may lead to reduced discretionary spending by consumers.

Home Depot also forecasted that sales would barely increase in fiscal year 2023. Due to soaring inflation and a housing market downturn, Home Depot missed Wall Street's quarterly sales estimates for the first time since November 2019. Its Q4 sales were $35.83 billion, below the Wall Street consensus of $35.97 billion. This week, earnings reports from eBay, Nvidia, Papa John's, Beyond Meat, and Warner Bros. Discovery are also expected.

Geopolitical concerns also heightened in the market as Russian President Vladimir Putin declared the suspension of the U.S.-Russia nuclear arms control agreement 'New START' before the market opened. Ahead of the one-year anniversary of the war's outbreak, President Biden, visiting Poland after Kyiv, reaffirmed U.S. support by stating, "The war in Ukraine will never be a victory for Russia." Earlier, in his state address, President Putin blamed the West and Ukraine for the war.

The dollar showed strength. The Dollar Index, which measures the value of the dollar against six major currencies, rose more than 0.3% to around 104. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street's 'fear gauge,' rose more than 7%, hovering around the 22 level.

Oil prices fell for the fifth consecutive trading day due to the strong dollar and Fed tightening concerns. On the New York Mercantile Exchange, March delivery West Texas Intermediate (WTI) crude oil closed at $76.16 per barrel, down 18 cents (0.24%) from the previous session.