[New York Stock Market] Decline on FOMC Minutes Showing 'Inflation Concerns'... Nasdaq Down 1.15%

Major indices on the U.S. New York Stock Exchange closed lower on the 16th (local time) as they digested the July Federal Open Market Committee (FOMC) minutes, which left the door open for further interest rate hikes amid significant inflation concerns.

On the New York Stock Exchange (NYSE) that day, the Dow Jones Industrial Average fell 180.65 points (0.52%) from the previous close to finish at 34,765.74. The large-cap S&P 500 index dropped 33.53 points (0.76%) to 4,404.33, while the tech-heavy Nasdaq index declined 156.42 points (1.15%) to close at 13,474.63.

All but one of the 11 sectors in the S&P 500, excluding utilities, declined. Following a warning from Fitch that dozens of banks, including JPMorgan Chase, could face credit rating downgrades, major large banks continued to weaken. Bank of America (BoA) fell 2.17%, Wells Fargo dropped 1.19%, and Citigroup declined 1.32%. Energy stocks such as ExxonMobil and Chevron also slipped. Target, which released earnings that day, rose nearly 3% on the back of quarterly net income that exceeded expectations. Tesla fell more than 3% after announcing price cuts for Model X and Model S in China. Intel also dropped over 3%, dragging down the Dow Jones index.

[Image source=Reuters Yonhap News]

Investors closely watched the July FOMC minutes released that afternoon, along with concerns about defaults in the Chinese real estate sector, the impact of Fitch’s warning on U.S. banks from the previous day, and economic data releases. The July FOMC minutes revealed that Fed officials expressed significant concerns about inflation and left open the possibility of further interest rate hikes. The minutes stated, "Most participants acknowledged that inflation remains significantly above the price stability goal and that the labor market is tight, confirming a significant upside risk to inflation," adding that "this may require additional tightening of monetary policy."

Previously, the Fed raised U.S. interest rates to 5.25-5.5%, the highest level since 2001, at last month’s FOMC meeting. This was the 11th rate hike since the Fed began its rate hike cycle in March last year and marked a resumption of increases just one month after a unanimous pause in June. Some participants had argued for a pause. While all 11 voting members of the FOMC unanimously agreed on the July rate hike, some dissenting opinions were expressed among the full panel of 18 members. These dissenters argued that it was necessary to skip one more rate decision to assess the cumulative impact of tightening policies on the overall economy.

The minutes noted, "Participants highlighted that uncertainty about the economic outlook remains high," and "agreed that future policy decisions will depend on the totality of incoming data, economic outlook, inflation effects, and the impact on the risk balance." They also mentioned the so-called ‘dual risks’?concerns that excessive tightening could unnecessarily contract the economy, while easing too quickly could lead to a repeat of past mistakes with inflation surging again.

Quincy Crosby, Chief Global Strategist at LPL Financial, commented, "Following the FOMC minutes indicating that economic conditions need to deteriorate, the market has continued to show selling pressure."

Investors are now focusing on next week’s Jackson Hole forum. The key question is what signals Fed Chair Jerome Powell will send there. Since the last FOMC, some officials, including Patrick Harker, President of the Philadelphia Federal Reserve Bank, have ruled out rate cuts this year but hinted that the rate hike cycle may be ending. With about a month left until the September FOMC, there are still many inflation and employment indicators to watch. However, recent strong economic data, such as July retail sales released the previous day, have raised concerns that Fed tightening could be prolonged.

Currently, the market largely expects rates to remain unchanged in September. According to the CME FedWatch tool, federal funds futures on the afternoon of the 16th reflected an over 88% probability that the Fed will hold rates steady in September. Although the Fed’s June dot plot indicated the possibility of one more hike this year, investors are betting on no further increases. There are three remaining FOMC meetings this year?in September, November, and December.

U.S. housing starts for July, released that day, rose 3.9% month-over-month to 1.452 million units, in line with Wall Street expectations. New building permits, a key indicator of future housing market trends, increased 0.1% to 1.442 million units. Industrial production in July returned to growth after three months, rising 1.0% month-over-month, surpassing market expectations of +0.3%.

Corporate earnings announcements continue. Following Target, Walmart and Ross Stores are scheduled to report the next day. Walmart had raised its sales forecast earlier this year in May, buoyed by strong grocery and e-commerce performance. There are expectations that Walmart could post an earnings surprise exceeding estimates.

Economic news from China is weighing on investor sentiment. Previously released data for July retail sales and industrial production in China were worse than expected. Additionally, the People’s Bank of China’s surprise policy rate cut has intensified concerns about the Chinese real estate crisis. Major foreign media outlets are also wary of liquidity issues not only at China’s largest real estate developer, Biguiyuan, which is facing default risk, but also at Zhongling International Trust. With sluggish domestic demand and default concerns among large real estate firms piling up, some forecasts suggest China’s economic growth rate this year may remain in the 4% range.

In the New York bond market that day, U.S. Treasury yields rose as investors digested the FOMC minutes. The benchmark 10-year Treasury yield hovered around 4.27%, while the 2-year yield, which is sensitive to monetary policy, traded near 4.98%. The dollar index, which measures the dollar’s value against six major currencies, rose more than 0.2% to around 103.4.

International crude oil prices fell below $80 per barrel amid dollar strength. On the New York Mercantile Exchange, September delivery West Texas Intermediate (WTI) crude closed down $1.61 (1.99%) at $79.38 per barrel.