[New York Stock Market] Decline on Inflation Data Exceeding Expectations... Nasdaq Down 1.69%

[Asia Economy New York=Special Correspondent Joselgina] Major indices of the U.S. New York stock market closed lower on the 24th (local time) as the inflation indicator preferred by the Federal Reserve (Fed) exceeded expectations. As inflationary pressures were confirmed again, concerns about Fed's tightening intensified.

On this day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 32,816.92, down 336.99 points (1.02%) from the previous session. The S&P 500, which is focused on large-cap stocks, fell 42.28 points (1.05%) to 3,970.04, and the tech-heavy Nasdaq Composite dropped 195.46 points (1.69%) to 11,394.94.

On a weekly basis, the Dow fell 3.0%, marking the largest decline since September last year. The S&P 500 and Nasdaq indices fell 2.7% and 3.3%, respectively. David Donabedian, Chief Investment Officer (CIO) at CIBC Private Wealth, said, "Investor perception is shifting that the Fed may end rate hikes and start cutting rates."

Among the sectors in the S&P 500, nine sectors except financials and commodities showed weakness across the board. Particularly, the declines in interest rate-sensitive sectors such as technology and real estate were notable. By stock, Beyond Meat rose more than 10% as its quarterly loss narrowed more than expected. Nvidia, which surged more than 14% the previous day on strong earnings, fell 1.60%. Boeing dropped 4.83% on news that deliveries of the 787 Dreamliner passenger aircraft would be temporarily suspended.

[Image source=Reuters Yonhap News]

Investors closely watched the January Personal Consumption Expenditures (PCE) price index, the inflation indicator preferred by the Fed, and movements in Treasury yields. According to the U.S. Department of Commerce, the January PCE price index rose 0.6% month-over-month and 5.4% year-over-year, exceeding Wall Street expectations. The core PCE, which excludes volatile energy and food prices, also rose 4.7% year-over-year, surpassing market forecasts of 4.4% and the revised previous month’s figure of 4.6%.

This immediately fueled concerns about inflation becoming entrenched, strengthening expectations that the Fed's tightening could intensify. Peter Cardillo, Chief Economist at Spartan Capital Securities, said, "PCE is the Fed's preferred indicator," and added, "The Fed will remain hawkish until at least the second half of the year."

Fed officials also delivered hawkish remarks. Earlier, Loretta Mester, President of the Federal Reserve Bank of Cleveland, who hinted at the need for a big rate hike (a 0.5 percentage point increase in the benchmark rate), said in an interview with CNBC, "I think rates need to go above 5%." While the extent of the hikes depends on future economic conditions, she also mentioned that the Fed should maintain rates above 5% for some time to achieve the 2% inflation target. Susan Collins, President of the Federal Reserve Bank of Boston, also argued that rates should be raised to a restrictive level and maintained there for a long period.

According to the Chicago Mercantile Exchange (CME) Group’s FedWatch, the federal funds (FF) futures market reflected a 40% chance of a big rate hike in March immediately after the PCE release but then declined. However, since the Fed has already started to slow down, it is expected that policy changes will not be made based solely on one month’s data, and the possibility of a baby step (a 0.25 percentage point increase) in March remains more likely. Economist Cardillo said, "We need to wait and see if a 0.5 percentage point hike will follow in March," adding, "Further rate hikes will continue, and this cycle will likely conclude in the second half of the year."

Accordingly, investors are expected to monitor economic indicators and Fed officials’ remarks to assess the path of further tightening until the March FOMC meeting. Next week, in addition to economic indicators such as the ISM Purchasing Managers' Index (PMI), corporate earnings reports from companies including Target and Costco are scheduled.

In the New York bond market, Treasury yields rose. The 10-year U.S. Treasury yield climbed to around 3.94%, marking the highest level in the past three months. The 2-year yield, which is sensitive to monetary policy, stood at the 4.8% range. The U.S. dollar also strengthened. The Dollar Index, which measures the value of the dollar against six major currencies, moved above 105, up more than 0.5%.

International oil prices rose. On the New York Mercantile Exchange, the April delivery West Texas Intermediate (WTI) crude oil price closed at $76.32 per barrel, up 93 cents (1.23%) from the previous session.