[New York Stock Market] Falling Close Amid Soaring Treasury Yields... Nasdaq Down 1.82%

The three major indices of the U.S. New York stock market all closed lower on the 21st (local time) as Treasury yields soared following the Federal Reserve's (Fed) indication of additional interest rate hikes. The benchmark 10-year U.S. Treasury yield jumped to its highest level since 2007.

At the New York Stock Exchange (NYSE) that day, the blue-chip-focused Dow Jones Industrial Average closed at 34,070.42, down 370.46 points (1.08%) from the previous session. The large-cap-focused S&P 500 index fell 72.20 points (1.64%) to 4,330.00, and the tech-heavy Nasdaq index dropped 245.14 points (1.82%) to 13,223.99.

All 11 sectors of the S&P 500 declined. Notably, real estate, consumer discretionary, and materials stocks saw significant drops. Amazon fell 4.41%, Tesla dropped 2.62%. Broadcom declined more than 2% after reports emerged that Google Alphabet is considering excluding the company from its AI semiconductor suppliers. Cisco fell over 4% on news of its acquisition of Splunk, while Splunk surged more than 20%. FedEx rose over 4.5% after posting earnings that beat expectations following the previous day's market close. Fox Corporation and News Corporation (NewsCorp) rose by 3% and around 1%, respectively, on news of Rupert Murdoch's retirement.

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Investors digested the results of the September Federal Open Market Committee (FOMC) meeting released the previous afternoon, closely watching Treasury yield movements, economic indicators, and concerns over a potential federal government shutdown. The Fed's so-called "hawkish pause," signaling additional rate hikes, further strengthened the market's risk-averse sentiment. In the new dot plot, the Fed raised the median interest rate forecast for the end of 2024 from 4.6% to 5.1%, and for the end of 2025 from 3.4% to 3.9%. This suggests that even if the Fed begins cutting rates, elevated interest rates will persist for a longer period than previously expected.

This hawkish message led to rising Treasury yields in the New York bond market that day. The 10-year yield approached 4.5%, marking its highest level since 2007. The 30-year yield reached 4.55%, the highest since 2011. The 2-year yield, which is sensitive to monetary policy, hovered around 5.14%. Adam Turnquist, Chief Technical Strategist at LPL Financial, recently described the rising Treasury yields as "a kind of warning signal to the market."

The weekly initial jobless claims released that day also acted as a catalyst for the rising Treasury yields. According to the U.S. Department of Labor, new jobless claims for the week of September 10?16 fell by 20,000 to 201,000, the lowest level in eight months and below Wall Street experts' forecast of 225,000. This indicates that despite the Fed's tightening, the labor market remains robust. Ian Lyngen of BMO Capital Markets said, "This slightly increases the likelihood of a Fed rate hike in November and firmly reinforces the Fed's message that rates will not be cut for a long time in 2024." However, the Philadelphia Federal Reserve's September manufacturing index released the same day showed -13.5, significantly below the Dow Jones estimate of 0. The second-quarter current account deficit narrowed by $2.5 billion from the previous quarter to $212.1 billion.

There are two remaining FOMC meetings this year, in November and December. However, the market still largely expects a rate hold in November. According to the Chicago Mercantile Exchange (CME) FedWatch tool, as of that afternoon, federal funds futures priced in more than a 68% chance that the Fed will hold rates steady in November. The probability of a "baby step" (a 0.25 percentage point rate hike) was around 31%.

James Bullard, former president of the Federal Reserve Bank of St. Louis and considered a prominent hawk (favoring monetary tightening), emphasized in an interview with Bloomberg TV that additional rate hikes are necessary to prevent the risk of accelerating inflation. Bullard, who recently moved to become dean of the Purdue University Krannert School of Management, was known as a hardline hawk during his time at the Fed. He also agreed with the Fed's recent indication of prolonged high rates, calling it "reasonable."

The Wall Street Journal (WSJ) separately reported an analysis suggesting that high interest rates could effectively become permanent. The publication attributed the recent surge in long-term Treasury yields and the stock market's weakness to a rise in the neutral rate, stating, "If current rates do not slow demand or inflation, the neutral rate must be higher, and monetary policy is not restrictive."

Meanwhile, investors are also monitoring the possibility of a federal government shutdown. Concerns over a shutdown are growing as the budget bill necessary for next year's federal government operations is delayed. To avoid a shutdown, the budget must be passed before the start of the 2024 fiscal year on October 1.

The U.S. dollar showed strength. The dollar index, which measures the dollar's value against six major currencies, rose 0.2% to 105.4. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street's "fear gauge," surged more than 15%, trading around 17.5.

Concerns about oil-driven inflation continue in the market. Jeffrey Gundlach, CEO of DoubleLine Capital, told CNBC that "the probability of rate hikes has increased more than expected before oil prices rose." However, oil prices slightly declined that day due to profit-taking. On the New York Mercantile Exchange, November delivery West Texas Intermediate (WTI) crude oil closed down 3 cents (0.03%) at $89.63 per barrel.