[New York Stock Market] Inflation Concerns Spread Tightening Caution... Nasdaq Down 1.06%

The three major indices of the U.S. New York stock market all closed lower on the 6th (local time) as concerns over tightening monetary policy resurfaced due to stronger-than-expected service sector economic data and rising oil prices.

On the day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 198.78 points (0.57%) from the previous close to finish at 34,443.19. The large-cap focused S&P 500 index dropped 31.35 points (0.70%) to 4,465.48, while the tech-heavy Nasdaq index declined 148.48 points (1.06%) to close at 13,872.47.

Within the S&P 500, all nine sectors except energy and utilities fell. The decline was particularly notable in technology stocks. Apple and Nvidia dropped 3.58% and 3.05%, respectively, from the previous close. Due to the European Union (EU)'s big tech regulations, not only Apple but also Amazon (-1.39%) and Google Alphabet (-0.96%) showed weakness. AMC Entertainment plunged more than 36% after announcing plans to sell up to 40 million common shares. Southwest Airlines fell about 2.6% after lowering its third-quarter revenue forecast and expressing concerns over rising fuel costs. Conversely, Roku rose nearly 3% following cost-cutting measures including layoffs.

[Image source=Reuters Yonhap News]

Investors closely monitored international oil prices, government bond yields, key economic indicators released that day, and remarks from Federal Reserve (Fed) officials. The combination of stronger-than-expected economic data, rising oil prices, and increasing bond yields heightened market concerns about monetary tightening.

The U.S. ISM August Services Purchasing Managers' Index (PMI), released that morning, stood at 54.4, the highest level since February. This exceeded the market forecast of 52.5. A PMI above 50 indicates economic expansion, while below 50 signals contraction. CNBC reported that, in contrast to the manufacturing sector which has been contracting for 10 consecutive months, the services sector expanded for the eighth consecutive month. Inventories rose by 7.3 points, and the employment index increased by 4 points. On the same day, S&P Global's August Services PMI was finalized at 50.5, below the previous month's 52.3 but still above the baseline of 50, indicating continued expansion.

Adam Crisafulli of Vital Knowledge commented, "The ISM has reinforced all the concerns that have been troubling the stock market for weeks," adding, "High bond yields reduce stock valuations, robust growth and sticky inflation continue to pressure the Fed, and oil prices present additional opportunities."

International oil prices rose for the ninth consecutive trading day amid concerns over extended production cuts by major oil-producing countries. On the New York Mercantile Exchange, October delivery West Texas Intermediate (WTI) crude oil closed at $87.54 per barrel, up $0.85 (0.98%) from the previous day. This is the highest closing price since November 11 of last year.

Mohamed El-Erian, chief advisor at Allianz, appeared on CNBC's Squawk Box and predicted that rising oil prices would increase inflationary pressures and, combined with stronger-than-expected economic conditions, would impact the Fed's future rate decisions. He also forecasted that the Fed would hold rates steady this month but left open the possibility of one more rate hike later. Bill Muir, head of capital markets research at U.S. Bank Wealth Management, also noted, "Rising oil prices can feed into inflation, which then affects bond yields and the Fed's monetary policy."

The Fed's Beige Book, released that afternoon, indicated that economic growth was moderate in most regions. Inflation appeared to have slowed in most areas. This Beige Book will serve as reference material for the September Federal Open Market Committee (FOMC) meeting scheduled for the 19th-20th.

According to the Chicago Mercantile Exchange (CME) FedWatch tool, federal funds futures markets in the afternoon priced in more than a 93% probability that the Fed will hold rates steady in September. The probability of a rate hold in November was around 56%. Although the Fed's June dot plot indicated the possibility of one more rate hike this year, the market still leans more toward a pause. The remaining FOMC meetings this year are in September, November, and December.

Susan Collins, president of the Boston Federal Reserve Bank, said at an event in Boston that day, "We are close to or possibly at the peak of the policy rate," but added, "Additional tightening may be necessary depending on incoming data." She emphasized that at this stage of the policy cycle, patience and a comprehensive evaluation of data are essential, calling for a cautious approach.

In the New York bond market that day, government bond yields rose. Heightened concerns about tightening pushed the yield on the two-year Treasury note, which is sensitive to monetary policy, above 5%. The benchmark 10-year yield hovered around 4.29%. The dollar index, which measures the value of the U.S. dollar against six major currencies, remained steady near 104.8.

The U.S. trade deficit widened. According to the U.S. Department of Commerce, the July trade deficit increased 2.0% month-over-month to $65 billion. Exports rose by $3.9 billion to $251.7 billion, while imports increased by $5.2 billion to $316.7 billion, leading to a larger deficit. However, the July trade deficit was below the Dow Jones estimate of $68 billion.