[New York Stock Market] Tightening Concerns Amid Canada Rate Hike... Nasdaq Down 1.29%

The three major indices of the U.S. New York stock market closed mixed on the 7th (local time) due to concerns over high valuations and tightening measures. In particular, the Nasdaq index, which is centered on technology stocks, fell more than 1% amid growing concerns that the Fed might also tighten further following the surprise interest rate hike by the Bank of Canada.

On this day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 33,665.02, up 91.74 points (0.27%) from the previous session. Meanwhile, the S&P 500 and Nasdaq indices, which hit their highest levels of the year the day before, both declined. The large-cap focused S&P 500 fell 16.33 points (0.38%) to 4,267.52, and the Nasdaq dropped 171.52 points (1.29%) to close at 13,104.89.

Within the S&P 500, energy, real estate, industrials, utilities, and materials stocks rose, while technology, communication, discretionary consumer goods, and health-related stocks declined. Entertainment giant Dave & Buster's surged more than 18% after its earnings announcement. Warner Bros. Discovery rose over 8% following news of CNN CEO Chris Licht's resignation. GameStop, which reported earnings after the market close, rose 5.75%. Coinbase, which had plunged more than 12% the previous day due to an SEC indictment, rebounded by over 3%. Regional bank stocks, including PacWest Bancorp (+14.38%), also rallied.

Despite overall weakness in big tech stocks such as Microsoft (-3.09%), Google Alphabet (-3.78%), and Amazon (-4.25%), Tesla rose 1.47% after revealing that its Model 3 met the tax credit requirements under the Inflation Reduction Act (IRA). Tesla's stock price briefly surged to $230.83 during the session, marking its highest level in over seven months since November 1 of last year.

[Image source=Reuters Yonhap News]

Investors closely monitored the market atmosphere while awaiting next week's Consumer Price Index (CPI) release and the Federal Reserve's monetary policy decision. Following Australia, the Bank of Canada also raised interest rates, further heightening investors' caution about tightening. The Bank of Canada raised its benchmark rate to 4.75%, the highest in 22 years, citing inflationary pressures. This fueled concerns that the Fed might opt for additional tightening rather than holding rates steady.

This immediately dampened investor sentiment, especially for growth and technology stocks sensitive to interest rates. The U.S. Treasury market was also affected. The two-year Treasury yield, which is sensitive to monetary policy, rose to around 4.55%, while the 10-year Treasury yield climbed to about 3.79%. Bob Doll, Chief Investment Officer at Crossmark Global Investments, said, "There will be more impact going forward," indicating that the effects of interest rate decisions are expected to grow.

However, the market still largely expects a rate hold. According to the CME FedWatch tool, the federal funds futures market currently prices in about a 71% chance that the Fed will keep rates unchanged this month. The probability of an additional 0.25 percentage point hike stands at around 28%. Sam Stovall, Chief Investment Strategist at CFRA Research, predicted that the Fed will hold rates steady in June and that the market will rally. He noted, "Historically, the market rose 88% of the time (14 out of 16) when the Fed decided to skip a rate hike, with an average gain of 3.7% over eight months," adding, "I believe investors will be pleased once again if the Fed holds rates."

Ultimately, the CPI report to be released on the 13th is expected to be pivotal for monetary policy. Some analysts suggest that if the May CPI does not show a meaningful easing, the Fed's tightening stance could become more aggressive. Futures markets indicate more than a 50% chance of a rate hike in July following a hold in June. Bank of America (BoA) expressed concerns about the downward rigidity of inflation and analyzed that even if the Fed holds rates in June, it may raise them in July. Ahead of the FOMC meeting, Fed officials are currently in a blackout period, refraining from related comments.

U.S. Treasury Secretary Janet Yellen said in an interview with CNBC that she sees "inflation coming down with a strong labor market" and expects it to continue declining through next year. She noted that while personal consumption remains solid, some economic sectors are showing signs of slowing, emphasizing that lowering inflation is the "top priority." She also stated that the overall banking system is sound but warned of potential issues related to commercial real estate and the possibility of small bank mergers in the future.

Meanwhile, investors are also focusing on follow-up issues after President Joe Biden signed the U.S. debt ceiling suspension bill. Wall Street is watching for potential impacts from large-scale Treasury issuance, which could raise short-term borrowing costs and absorb liquidity in the market.

The U.S. trade deficit for April, released on this day, surged 23% from the previous month to $74.6 billion, marking the largest deficit in six months since October last year. However, this was slightly below Wall Street's forecast of $75.8 billion. April imports rose 1.5% to $323.6 billion, driven by increased imports of automobiles, cell phones, and parts. Conversely, exports fell 3.6% to $249 billion, with weak shipments of crude oil and consumer goods.

The U.S. dollar remained steady. The Dollar Index, which measures the dollar's value against six major currencies, hovered around 104.14, similar to the previous session. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) fell 0.02 points (0.14%) to 13.94, marking its lowest level since January 2020, before the COVID-19 pandemic.

Oil prices rose. On the New York Mercantile Exchange, the July delivery West Texas Intermediate (WTI) crude oil price closed at $72.53 per barrel, up 79 cents (1.10%) from the previous day.