[New York Stock Market] Sharp Drop on Powell's "No Rate Cut This Year"... Nasdaq Down 1.6%

Major indices on the U.S. New York Stock Exchange closed lower on the 22nd (local time) despite concerns over banking risks highlighted after the Silicon Valley Bank (SVB) bankruptcy, as the Federal Reserve (Fed) continued its interest rate hikes. Remarks by Fed Chair Jerome Powell stating "we are not considering rate cuts this year" and Treasury Secretary Janet Yellen's comment that "comprehensive insurance is not being considered" dampened market sentiment.

On the day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 530.49 points (1.63%) to close at 32,030.11. The large-cap focused S&P 500 index dropped 65.90 points (1.65%) to 3,936.97, and the tech-heavy Nasdaq index declined 190.15 points (1.60%) to finish at 11,669.96.

All 11 sectors in the S&P 500 showed declines. Real estate, financials, and energy stocks experienced notable drops. Regional bank stocks also led the downward trend. First Republic Bank, which had been caught in turmoil with extreme volatility following the SVB bankruptcy, showed double-digit gains in the morning but ultimately closed down 15.47% from the previous close. PacWest Bancorp also fell 17.12%. The SPDR S&P Regional Banking ETF dropped 5.69%. Meanwhile, the representative 'meme stock' GameStop surged over 25% after reporting earnings that exceeded expectations. Nike fell nearly 5% amid concerns over excess inventory and weak sales in China.

[Image source=Reuters Yonhap News]

Investors closely watched the results of the March FOMC regular meeting released in the afternoon and the subsequent press conference by Fed Chair Jerome Powell. The Fed raised the federal funds rate by 0.25 percentage points from the previous 4.5-4.75% range to 4.75-5% at this meeting. Despite heightened concerns over a banking system crisis, the Fed continued its tightening path with a baby step (0.25 percentage point rate hike).

At the press conference, Chair Powell revealed that he had considered temporarily pausing rate hikes in light of the SVB bankruptcy impact. However, he explained the reason for continuing the hikes, stating, "Data on inflation and the labor market were stronger than expected, so it was appropriate to continue the rate increases."

This FOMC attracted attention as the Fed's first rate decision following the SVB bankruptcy, which intensified concerns about a banking system crisis. The rapid tightening since last year was confirmed to have directly worsened the asset quality of banks, including SVB, putting a brake on the Fed's tightening path. Powell began the press conference by addressing the heightened banking risks. He first stated, "All depositors' savings are safe," and added, "Our banking system has strong capital and liquidity and is sound and resilient." He also emphasized, "The SVB bankruptcy is an exceptional case," and "It is not a risk across the entire U.S. banking system."

The accompanying dot plot showed a year-end rate forecast of 5.1% for this year, the same level as the December FOMC last year. Looking at individual members' forecasts, 10 out of 18 expected the year-end rate to be between 5.0 and 5.25%. Consequently, expectations spread in the market that the cycle would effectively end after one more rate hike. The March FOMC statement removed the phrase "ongoing rate increases are appropriate" and included the expression "policy firming," further fueling hopes that the rate hike cycle was nearing its end.

However, Powell dismissed expectations of a pivot by stating at the press conference, "We are not considering cuts this year," which put downward pressure on the stock market. He reiterated at the end of the conference, "There will be no cuts this year."

Thomas Simons, economist at Jefferies, said, "This aligns with our forecast that the Fed will raise rates to 5.125% and hold them for an extended period," adding, "Unless contagion risks in the banking sector escalate, the Fed will face a similar policy decision again in May." Sam Stovall, chief investment strategist at CFRA Research, predicted continued rate hikes, saying, "The Fed is still signaling that inflation is the main guide." He noted that while there may be a few more troubled regional banks, the Fed's emphasis on depositor protection suggests much of the banking crisis has been alleviated.

Yellen's denial of reports that she was considering guaranteeing all deposits in testimony before Congress also negatively affected the market. She said, "We have not discussed or considered anything related to comprehensive insurance covering all bank deposits," adding, "That is not something we are pursuing."

This week, following the Fed, the Bank of England (BOE) is scheduled to announce its rate decision on the 23rd. The market currently expects the BOE to take a baby step. The UK’s February Consumer Price Index (CPI) released that day showed a 10.4% year-over-year increase, exceeding both market expectations (9.9%) and the previous month's rise (10.1%). On the same day, European Central Bank (ECB) President Christine Lagarde stated in a speech, "Since July last year, we have raised rates by 3.5 percentage points. However, inflation remains high, and uncertainty about the future path has increased."

In the New York bond market, prices fell as the FOMC decision was digested. The 2-year U.S. Treasury yield, sensitive to monetary policy, rose to around 4.25% intraday before falling back to the 3.96% range. The 10-year yield dropped to around 3.45%.

The dollar weakened. The dollar index, which measures the value of the dollar against six major currencies, fell 0.7% to around 102.5.

International oil prices rose. At the New York Mercantile Exchange, May delivery West Texas Intermediate (WTI) crude oil closed at $70.90 per barrel, up $1.23 (1.77%) from the previous day.