[New York Stock Market] Inflation Slows Amid Renewed Regional Bank Concerns... Only Nasdaq Rises

The three major indices of the U.S. New York stock market closed mixed on the 11th (local time) amid the release of inflation data below expectations and renewed concerns over regional banks.

On the day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 221.82 points (0.66%) from the previous close to finish at 33,309.51. The S&P 500, which focuses on large-cap stocks, dropped 7.02 points (0.17%) to 4,130.62. The tech-heavy Nasdaq index rose 22.06 points (0.18%) to close at 12,328.51.

Among the S&P 500 sectors, eight out of eleven sectors declined, excluding communication services, consumer discretionary, and consumer staples. Notably, energy, real estate, and utilities sectors saw significant drops. Volatility in regional bank stocks increased, leading to a decline in financial stocks as well. On the day, PacWest Bancorp announced that deposits fell by 9.5% last week, causing its stock to plunge more than 22% from the previous close. Shares of other regional banks such as Western Alliance Bancorp and First Horizon also declined.

Walt Disney fell 8.73% despite earnings meeting expectations, as streaming subscribers decreased. Disney's decline played a major role in dragging down the Dow Jones index. Wall Street activist investor Carl Icahn’s ‘Icahn Enterprises’ dropped nearly 2% following a short-seller attack and news of a prosecutor’s investigation the previous day. Peloton announced a recall of approximately 2.2 million exercise bikes due to safety concerns, falling 8.90%. Alphabet rose more than 4% after Google fully opened its chatbot ‘Bard’ at its annual developer conference the previous day. Tesla and Amazon also posted gains around 2%.

[Image source=Reuters Yonhap News]

Investors examined indicators such as the Producer Price Index (PPI), released before the market opened, to gauge the Federal Reserve’s (Fed) policy path and economic outlook, while closely monitoring concerns over regional banks. PacWest’s announcement of a 9.5% deposit decline last week further heightened volatility surrounding regional bank stocks. PacWest immediately announced it could provide $15 billion in liquidity support, but investor concerns remain unresolved.

Dillen Kramer, Co-Chief Investment Officer at Satuit, said, "Investors are now focusing on the economic backdrop, liquidity, interest rates, and inflation conditions," adding, "The PacWest news relates to vulnerabilities from the regional banking crisis and the debt ceiling. Both factors are interacting simultaneously," describing the market sentiment.

The market also expressed caution that failure by the U.S. Congress to raise the debt ceiling could lead to an unprecedented default. Jamie Dimon, chairman of JP Morgan 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 fear. 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, "This could impact global markets as well."

The U.S. exhausted its $31.4 trillion debt ceiling on January 31 and has since used extraordinary measures to buy time for negotiations, but those measures are nearing their limits. Treasury Secretary Janet Yellen has indicated that the X-date, when cash runs out, is June 1. This week, President Joe Biden met with House Speaker Kevin McCarthy and other bipartisan leaders, but no breakthrough was reached. They are scheduled to meet again on the 12th. However, expectations are low as Republicans insist on large government spending cuts as a precondition, while President Biden and Democrats demand an unconditional debt ceiling increase, leading to a standoff.

The wholesale price data 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 rose 2.3% year-over-year, down from 2.7% in March, marking the lowest level since January 2021. On a monthly basis, April PPI increased by only 0.2%, below Wall Street’s forecast of a 0.3% rise.

Considering that wholesale price increases typically pass through to consumer prices, these figures are interpreted as a signal of easing inflationary pressure. Quincy Crosby, Chief Global Strategist at LPL Financial, said, "The PPI released today shows prices are gradually declining, which is an important indicator for markets concerned about inflation trends." The CPI released the previous day also fell short of market expectations. April CPI rose 4.9% year-over-year, the smallest increase since April 2021. Additionally, China’s National Bureau of Statistics reported March CPI and PPI figures below expectations, suggesting easing inflationary pressures there as well.

Following the confirmation of inflation easing trends by both CPI and PPI, there is ongoing speculation that the Fed will halt interest rate hikes starting with the June Federal Open Market Committee (FOMC) meeting. According to the Chicago Mercantile Exchange (CME) FedWatch tool, as of the afternoon, federal funds futures markets are pricing in nearly a 90% chance that the Fed will hold rates steady in June. There are also bets 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 indicating cooling labor market conditions, which the Fed has been concerned about, 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. Continuing claims, for those filing for unemployment benefits for at least two weeks, rose by 12,000 to 1.81 million. Edward Moya, analyst at OANDA, said, "Neither the PPI nor jobless claims were surprising," adding, "The indicators are moving in the right direction, supporting expectations that the Fed will end rate hikes."

In the New York bond market, Treasury yields showed a slight decline. The two-year Treasury yield, sensitive to monetary policy, fell to around 3.89%, while the 10-year yield dropped to about 3.38%. The dollar index, which measures the dollar’s value against six major currencies, rose more than 0.5% to the 102 level compared to the previous close.

International oil prices fell amid concerns over economic slowdown. On the New York Mercantile Exchange, June delivery West Texas Intermediate (WTI) crude oil closed at $70.87 per barrel, down $1.69 (2.33%) from the previous close.