New York Stock Market Opens Lower... Regional Bank Concerns Resurface Amid Slowing Inflation

The three major indices of the U.S. New York stock market all showed declines in early trading on the 11th (local time) amid the release of inflation data that fell short of expectations and renewed concerns over regional banks.

At around 10:33 a.m. at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average was down 358.49 points (1.07%) from the previous close, trading at 33,172.84. The large-cap-focused S&P 500 index fell 25.79 points (0.62%) to 4,111, while the tech-heavy Nasdaq index dropped 40.52 points (0.33%) to 12,265.

Currently, all ten sectors of the S&P 500, excluding telecommunications, are in decline. In particular, the energy, real estate, technology, and consumer discretionary sectors have losses exceeding 1%. PacWest Bancorp announced last week that deposits fell by 9.5%, causing its shares to plunge more than 18% from the previous close. Other regional bank stocks such as Western Alliance Bancorp, Zions, and First Horizon also showed declines. Walt Disney fell more than 8% despite meeting earnings expectations, due to a decrease in streaming subscribers. Carl Icahn’s activist investment firm, Icahn Enterprises, dropped over 3% following a short-seller attack and news of a prosecutor’s investigation the previous day. Alphabet rose more than 4% after Google fully opened its chatbot 'Bard' at its annual developer conference the day before.

[Image source=Reuters Yonhap News]

Investors are monitoring economic indicators such as the PPI released before the market opened to gauge the Fed’s future policy path and economic outlook, while keeping a close eye on concerns stemming from regional banks. PacWest’s announcement of a 9.5% deposit decline last week has once again increased volatility around regional bank stocks. Shortly after, PacWest announced it could immediately provide $15 billion in liquidity support, but investor concerns have not subsided.

Dillen Kramer, Co-Chief Investment Officer at Satuit, said, "Investors are now focusing on the economic backdrop, liquidity, interest rates, and inflation conditions," adding, "PacWest (news) is part of the vulnerabilities related to the regional banking crisis and the debt ceiling. Both factors are working in combination," describing the market sentiment.

The market also reflects caution that failure to raise the U.S. debt ceiling in Congress could lead to an unprecedented default. Jamie Dimon, chairman of JPMorgan Chase and known as the "Emperor of Wall Street," warned that as the U.S. approaches the possibility of default, the market could be engulfed in panic. In a Bloomberg TV interview, he said, "The closer we get to (default), the more the stock market volatility and Treasury turmoil could trigger panic," adding, "It could impact global markets as well."

The U.S. exhausted its $31.4 trillion debt ceiling in January and has since used special measures to buy time for negotiations, but those measures are nearing their limits. Treasury Secretary Janet Yellen has set June 1 as the X-day when cash runs out. This week, President Joe Biden and House Speaker Kevin McCarthy, along with other bipartisan leaders, met but failed to find a concrete solution. They are scheduled to meet again on the 12th. However, expectations for the meeting are low as the Republicans insist on large government spending cuts as a precondition, while President Biden and the Democrats demand an unconditional debt ceiling increase, resulting in a standoff.

The producer price index (PPI) released before the market opened showed that inflationary pressures are easing following the consumer price index (CPI) released the previous day. According to the U.S. Department of Labor, the April PPI, which reflects wholesale prices, rose 2.3% year-over-year. This is a slowdown from the 2.7% increase in March and the lowest level since January 2021. The April PPI also rose only 0.2% month-over-month, below Wall Street’s forecast of a 0.3% increase.

Experts interpret the recent easing in wholesale prices as a result of falling raw material prices and improvements in supply chains. Considering that increases in wholesale prices typically pass through to consumer prices later, these figures are also seen as a signal that inflationary pressures are easing. Quincy Krosby, Chief Global Strategist at LPL Financial, said, "The PPI released today shows prices are gradually falling, which is an important indicator for markets concerned about inflation trends." The CPI released the previous day also fell short of market expectations. The April CPI rose 4.9% year-over-year, marking the smallest increase since April 2021.

Accordingly, with the Fed reaffirming the inflation slowdown trend through both CPI and PPI, there is ongoing speculation that the Fed will halt rate hikes starting with the June Federal Open Market Committee (FOMC) meeting. According to the CME FedWatch tool, as of this morning, federal funds futures markets are pricing in over a 99% chance that the Fed will hold rates steady in June. Nearly half of the market is betting that rate cuts could begin as early as July. The Fed, which declared war on inflation, has raised rates ten consecutive times since March last year, bringing the U.S. benchmark rate to 5.0-5.25%.

On the same day, employment data suggesting a cooling of the labor market, which the Fed has been concerned about overheating, was released. Weekly initial jobless claims reached their highest level since October 2021. According to the U.S. Department of Labor, last week’s initial jobless claims totaled 264,000, an increase of 22,000 from the previous week. Continued claims, which represent those applying for unemployment benefits for at least two weeks, rose by 12,000 to 1.81 million. Among Wall Street experts, there is analysis that the cumulative tightening by the Fed and large-scale layoffs by big tech and investment banks are gradually being reflected in employment data.

Edward Moya, analyst at OANDA, said, "Neither the PPI nor the jobless claims were surprising," adding, "The indicators are moving in the right direction, supporting expectations that the Fed will end rate hikes."

Following the CPI release, U.S. Treasury yields declined in the New York bond market. The 2-year Treasury yield, sensitive to monetary policy, fell to around 3.85%, and the 10-year yield dropped to about 3.37%. The dollar index, which measures the dollar’s value against six major currencies, rose more than 0.5% to around 102.

European stock markets are also down. Germany’s DAX index fell 0.78%, France’s CAC index dropped 0.20%, and the UK’s FTSE index declined 0.61%.