[New York Stock Market] Banking Stocks Weaken Awaiting FOMC... Nasdaq Down 1.08%

The three major indices of the U.S. New York stock market all closed lower on the 2nd (local time) as concerns about the banking sector reignited ahead of the Federal Open Market Committee (FOMC) interest rate decision in May.

On the New York Stock Exchange (NYSE) that day, the Dow Jones Industrial Average closed at 33,684.53, down 367.17 points (1.08%) from the previous session. The S&P 500, which focuses on large-cap stocks, closed at 4,119.58, down 48.29 points (1.16%), and the tech-heavy Nasdaq closed at 12,080.51, down 132.09 points (1.08%).

All ten sectors of the S&P 500 except discretionary consumer goods showed a downward trend. In particular, energy-related stocks fell more than 4% as international oil prices plunged. Bank stocks also dropped more than 2%. Due to the bankruptcy of First Republic Bank, regional banks PacWest Bancorp and Western Alliance each fell more than 27% and 11%, respectively, compared to the previous session. On the same day, the NYSE announced it had suspended trading of First Republic’s shares and initiated delisting procedures. JP Morgan Chase, which announced the acquisition of First Republic the day before, also fell more than 1.6%, giving back gains from the previous session. Major banks such as Goldman Sachs, Bank of America, and Citigroup also showed declines in the 2-3% range.

Uber rose 11.55% after releasing earnings that exceeded expectations. Dell Technologies rose more than 2% after Morgan Stanley upgraded its investment rating to overweight. Icahn Enterprises slid nearly 20% after Hindenburg Research, which pursues activist short selling, released an overvaluation report. Chegg announced that its earnings were deteriorating due to OpenAI’s ChatGPT chatbot, causing its shares to plunge more than 48%.

[Image source=Reuters Yonhap News]

Investors closely watched banking sector concerns, major corporate earnings, U.S. debt ceiling negotiations, and key indicators while awaiting the FOMC results to be announced the following afternoon. Greg Basak, CEO of AXS Investment, said, "Concerns about the debt ceiling, uncertain future Federal Reserve (Fed) interest rate policy, and combined worries about the banking sector all affected investor sentiment." The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street’s “fear gauge,” rose more than 10% from the previous session to around 17.

With a baby step (a 0.25 percentage point increase in the benchmark interest rate) virtually certain at the May FOMC, the market’s focus is on when the rate will be paused. According to the CME FedWatch tool, as of that afternoon, the federal funds futures market reflected nearly an 85% probability that the Fed would take a baby step at the May FOMC. If so, the U.S. benchmark interest rate would reach 5-5.25%, the highest level in 16 years. The key issue is future policy moves. According to the dot plot released in March, a majority of the 18 FOMC members indicated a pause after one more rate hike. This baby step could be the last hike.

Rob Conzo, CEO of The Wealth Alliance, said that the Fed’s rate hike the next day would not be a big surprise to the market, adding, "What everyone is listening for is Fed Chair Jerome Powell’s remarks on how long these rate hikes will last and when rates will be cut." However, he also noted, "Powell is unlikely to comment on that."

Joe Kalish, global macro strategist at Ned Davis Research, said, "This will be the last rate hike of the tightening cycle," but added, "The Fed will want to keep options open in case economic data before the June FOMC do not meet expectations." Attention is also on how Fed officials will assess the banking sector situation related to JP Morgan’s acquisition of First Republic Bank announced the day before, as well as credit tightening due to banking sector concerns.

Earlier, the Reserve Bank of Australia (RBA) resumed rate hikes just one month after pausing, raising market concerns about tightening. RBA Governor Philip Lowe said, "Inflation has peaked but remains high," and "We judged that further hikes are appropriate to bring inflation back to target." Ahead of the European Central Bank’s (ECB) rate decision on the 4th, the Eurozone’s April Consumer Price Index (CPI) rose 7.0% year-on-year, released that day. The market is leaning toward a baby step by the ECB.

In the New York bond market that day, U.S. Treasury yields fell ahead of the FOMC. The 2-year Treasury yield, sensitive to monetary policy, dropped below 4%. The 10-year yield hovered around 3.43%. The Dollar Index, which shows the value of the dollar against six major currencies, fell more than 0.2% from the previous session to around 101.9.

Amid ongoing layoffs by major U.S. companies, private sector job openings in March also fell to the lowest level in about two years. According to the Job Openings and Labor Turnover Survey (JOLTs) released by the Labor Department that day, private sector job openings in March totaled 9.59 million. This is the lowest level in about two years since April 2021 and below Wall Street’s initial forecast of 9.7 million.

Among total separations, voluntary quits for job changes were 3.9 million, similar to the previous month. In contrast, involuntary separations such as layoffs increased to 1.8 million from the revised 1.6 million in the previous month. This is seen as a signal that the labor market is cooling down due to the Fed’s rapid tightening since last year. The day before, reports also emerged that major Wall Street investment bank Morgan Stanley would lay off 3,000 employees by the end of the second quarter.

The April employment report will be released on the 5th. Luke Tilley, chief economist at Wilmington Trust Investment Advisors, said, "The labor market appears to be normalizing," adding, "The biggest question is whether it will stop at a ‘normal’ state or lead to contraction."

Corporate earnings announcements continue. According to DataTrek Research, more than half of S&P 500-listed companies have reported earnings so far, with 79% exceeding profit expectations. After the market close that day, earnings from Ford, Starbucks, Caesars Entertainment, and others will be released. Apple, the company with the largest market capitalization, is scheduled to announce quarterly earnings on the 4th.

Additionally, investors are watching the atmosphere surrounding the U.S. Congress’s debt ceiling increase. The day before, Treasury Secretary Janet Yellen sent a letter warning congressional leaders, including House Speaker Kevin McCarthy, a Republican, of the possibility of default on June 1. This is much earlier than Goldman Sachs’s estimate of late July. If the two parties ultimately fail to agree on the debt ceiling, the financial market impact from a default is expected to be unavoidable.

International oil prices fell for the second consecutive trading day amid tightening concerns. On the New York Mercantile Exchange that day, June delivery West Texas Intermediate (WTI) crude oil closed at $71.66 per barrel, down $4 (5.29%) from the previous session. This is the lowest closing price since March 24.