[New York Stock Market] Rally on US Interest Rate Hold and Treasury Yield Drop... Nasdaq Up 1.64%

The three major indices of the U.S. New York stock market all closed higher on the 1st (local time) as they digested the results of the Federal Open Market Committee (FOMC) regular meeting, which decided to keep the benchmark interest rate unchanged.

At the New York Stock Exchange (NYSE), the blue-chip-focused Dow Jones Industrial Average closed at 33,274.58, up 221.71 points (0.67%) from the previous session. The large-cap-focused S&P 500 index rose 44.06 points (1.05%) to 4,237.86, and the tech-heavy Nasdaq index closed at 13,061.47, up 210.23 points (1.64%).

Among the S&P 500 sectors, all nine sectors except energy and consumer staples rose. Interest rate-sensitive technology and communication sectors showed gains around 2%. Semiconductor company AMD rose more than 9% despite a weaker-than-expected Q4 sales guidance, as it presented a positive outlook for its GPU data center segment. Nvidia jumped 3.79%. Leading tech stocks such as Tesla (+2.40%), Google Alphabet (+1.91%), Microsoft (+2.35%), and Apple (+1.87%) also rose together. On the other hand, WeWork plunged about 46% following reports that it may file for bankruptcy as early as next week.

[Image source=Getty Images Yonhap News]

Investors closely watched the FOMC regular meeting results released in the afternoon, Federal Reserve Chairman Jerome Powell’s press conference, and the resulting movements in Treasury yields.

The Fed unanimously decided to keep the federal funds rate unchanged at 5.25?5.5% at this meeting. This marks the second consecutive hold following September. Despite strong economic indicators, the decision is interpreted as reflecting tightening financial conditions due to the recent sharp rise in Treasury yields. The FOMC policy statement released that day added the term “financial” to the existing phrase “tightened credit conditions.” In the subsequent press conference, Fed Chair Jerome Powell acknowledged that financial conditions have tightened further due to the sharp rise in long-term Treasury yields since this summer, stating, "Considering the overall financial situation, it could influence future monetary policy."

However, Powell emphasized, "We are not yet confident that conditions are sufficiently restrictive," adding, "We will assess at each meeting whether additional tightening is needed." When asked if the December FOMC meeting, the last of the year, would mark the peak if no rate hike occurs, he replied, "We have not decided yet," and said, "We will consider data on the economy, inflation, and the labor market. There is significant uncertainty." He also added, "A pause in rate hikes does not mean it will be difficult to raise rates again." Regarding the possibility of rate cuts, he flatly dismissed it, saying, "We are not discussing that."

The key going forward is the still-strong indicators despite cumulative tightening. The policy statement’s economic assessment wording was adjusted from “solid” to “strong” pace, and the phrase regarding job growth was changed from “slowed” to “moderated.” The U.S. GDP for Q3, released last week, showed a 4.9% year-on-year increase, the highest growth since Q4 2021. The Department of Labor’s JOLTS (Job Openings and Labor Turnover Survey) released that day also confirmed labor market strength, with September job openings at 9.55 million, exceeding both the previous month and Wall Street expectations.

However, the private sector employment increase reported by ADP on the same day fell short of expectations. Private employment in October rose by 113,000, below the Dow Jones consensus forecast of 130,000. The October wage growth rate also recorded its lowest increase since October 2021 at 5.7%. Consequently, market attention is focused on the Department of Labor’s October employment report to be released on the 3rd. Since the Fed has stated that below-trend low growth and labor market cooling are necessary to reduce inflation, it is important to see if signs of slowing appear in the labor report. Wall Street expects nonfarm payrolls to increase by about 170,000 to 180,000, with the unemployment rate forecast at 3.8%. Meanwhile, the ISM manufacturing PMI for October, released the same day, came in at 46.7, below expectations. This is lower than both the previous month’s 49 and the Dow Jones consensus forecast of 49.2. A PMI below the baseline of 50 indicates contraction in business conditions.

Currently, the market is strongly expecting the Fed to hold rates steady at the December FOMC meeting, the last of the year. According to the Chicago Mercantile Exchange (CME) FedWatch tool, as of that day, federal funds futures markets reflect more than an 84% probability that the Fed will keep rates at 5.25?5.5%. The probability of a “baby step” (0.25 percentage point hike) in December is around 19%, down from 29% a week ago.

Many investors, regardless of the prolonged high-rate outlook, see a low chance of further rate hikes. Many interpret Powell’s hawkish remarks as rhetorical measures to prevent a rise in expected inflation. Dean Maki, chief economist at hedge fund Point72 Asset Management, emphasized, "If the Fed completely rules out rate hikes, the next question becomes ‘When will rate cuts come?’ So it is important to keep the possibility of rate hikes on the table."

U.S. Treasury yields fell in the New York bond market. After the Treasury Department’s borrowing plan report by maturity was released in the morning, Treasury yields continued to decline, and the drop widened during Powell’s press conference. The global benchmark 10-year U.S. Treasury yield fell to around 4.74%. The 2-year yield, sensitive to monetary policy, dropped to about 4.95%.

The dollar index, which measures the value of the U.S. dollar against six major currencies, is trading around 106.6. During the session, it briefly surpassed 106.9, marking the highest level since October 6. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street’s “fear gauge,” fell more than 7% to around 16.

International oil prices declined. On the New York Mercantile Exchange, December delivery West Texas Intermediate (WTI) crude oil closed at $80.44 per barrel, down 58 cents (0.72%) from the previous session. This is the lowest level since August 28.