[New York Stock Market] Strong Consumer Spending Weakens Rate Cut Expectations... Nasdaq Down 0.59%

The three major indices of the U.S. New York stock market all closed lower on the 17th (local time) due to better-than-expected retail sales and rising Treasury yields.

On the day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average, which is centered on blue-chip stocks, closed at 37,266.67, down 94.45 points (0.25%) from the previous session. The S&P 500, focused on large-cap stocks, fell 26.77 points (0.56%) to 4,739.21, and the tech-heavy Nasdaq dropped 88.72 points (0.59%) to close at 14,855.62.

All 11 sectors in the S&P 500 declined. In particular, real estate and utility stocks saw notable losses. Tesla fell about 2% after news that it would cut the price of the Model Y in Germany following China. Apple, facing growing concerns over slowing iPhone growth, also closed slightly lower. Chinese-related stocks listed on the New York Stock Exchange also showed weakness amid concerns over the Chinese economy. Didi Global dropped more than 5%, and Tencent Music fell over 3%. Spirit Airlines plunged 22% again after a U.S. federal court blocked JetBlue's merger and acquisition (M&A) the previous day.

[Image source=Reuters Yonhap News]

Investors closely watched the U.S. retail sales data, Treasury yield movements, and the Beige Book released that day to gauge the future direction of the Federal Reserve's (Fed) monetary policy. According to the U.S. Department of Commerce, retail sales in December last year increased by 0.6% compared to the previous month, exceeding Wall Street's forecast of 0.4%. Retail sales are considered a pillar accounting for two-thirds of the U.S. real economy and a comprehensive indicator of economic health.

With consumer spending remaining robust, hawkish voices advocating for maintaining high interest rates for the time being gained more strength. Chris Lakin, Managing Director at Morgan Stanley, said, "The Fed has consistently emphasized that there is no need to rush rate cuts," adding, "Since retail sales were stronger than expected, there is no need to change the policy stance of not rushing rate cuts."

David Solomon, CEO of Goldman Sachs attending the Davos Forum, appeared on CNBC that day and expressed caution, saying, "The market is moving too far ahead." He noted, "Many things are happening around the world," and warned that escalating geopolitical risks from the Middle East could potentially trigger an inflation shock.

Christopher Waller, a Fed governor known as a prominent hawk, also dampened market expectations for early rate cuts at a Brookings Institution event the previous day, stating, "There is no reason to cut rates quickly in this cycle." According to the Chicago Mercantile Exchange (CME) FedWatch tool, the futures market currently reflects about a 57% chance that the Fed will keep rates steady in January and then cut rates by at least 0.25 percentage points at the Federal Open Market Committee (FOMC) meeting in March.

The Fed was not the only institution drawing a line against early rate cut expectations. Christine Lagarde, President of the European Central Bank (ECB), also reiterated a data-driven policy approach in an interview with Bloomberg, forecasting that rate cuts would only be possible toward the end of this year. Klaas Knot, President of the Dutch Central Bank, warned that the market is moving ahead of itself and that such rate cut expectations could lead to 'self-destruction.'

However, the Beige Book released that afternoon contained signs that the previously overheated labor market, which had fueled inflation, is showing signs of cooling. The Beige Book stated, "In almost all regions, there were one or more signals indicating labor market cooling, such as an increase in job seekers, a decrease in turnover rates, selective hiring by companies, and easing wage pressures." This report evaluates economic conditions across the 12 Federal Reserve districts and serves as a basis for the FOMC regular meeting scheduled for the 30th-31st of this month.

In the New York bond market that day, the benchmark 10-year U.S. Treasury yield rose to around 4.10%, and the 2-year yield, sensitive to monetary policy, increased to about 4.35%. The dollar index, which measures the value of the U.S. dollar against six major currencies, remained steady around 103.3.

Jamie Dimon, CEO of JP Morgan Chase attending the Davos Forum, appeared on CNBC the same day and warned of persistent economic risks in the financial and geopolitical sectors, saying, "Very powerful forces will influence 2024 and 2025." He added, "I question whether we fully understand how quantitative tightening will work amid Ukraine, terrorism in Israel and the Red Sea. If I were the government, I would prepare for the assumption that things will not go well."

Corporate earnings announcements are also ongoing. Economic media assessed that fourth-quarter earnings could be the next major test for the market that will determine 2024. Jeffrey Buchbinder, Chief Investment Strategist at LPL Financial, said, "2023 was a year that benefited greatly from valuation improvements, and this year earnings will bear a heavy burden." Additionally, investors monitored economic indicators such as the Gross Domestic Product (GDP) released by China's National Bureau of Statistics.

International oil prices rose slightly despite weak Chinese data. On the New York Mercantile Exchange, the price of West Texas Intermediate (WTI) crude oil for February delivery closed at $72.56 per barrel, up 16 cents (0.22%) from the previous session.