[New York Stock Market] Decline After Pivot Point Delay... US Treasury Yields Rise

Decline on Powell and Fed Officials' 'Hawkish Remarks'
US 10-Year Treasury Yield Rises to 4.16%
NVIDIA Hits Record High on Target Price Upgrade

The three major indices of the U.S. New York stock market all closed lower on the 5th (local time) as the timing of the Federal Reserve's (Fed) interest rate cut expectations was pushed back. Investor sentiment weakened as Fed officials reaffirmed the stance following Fed Chair Jerome Powell's rejection of the possibility of a rate cut in March the previous day. The yield on the U.S. 10-year Treasury note rose to around 4.16% amid expectations that the pivot point (direction change) will be delayed.

[Image source=Yonhap News]

On the day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average, centered on blue-chip stocks, closed at 38,380.12, down 274.3 points (0.71%) from the previous session. The S&P 500, focused on large-cap stocks, fell 15.8 points (0.32%) to 4,942.81, and the tech-heavy Nasdaq dropped 31.28 points (0.2%) to 15,597.68.

By individual stocks, McDonald's fell 3.73% as overall sales missed market expectations due to decreased sales in the Middle East. Tesla declined 3.65% amid rumors of CEO Elon Musk's drug use and news of the German client SAP halting transactions. Nvidia rose 4.79% to $693.32 per share, hitting a record high after investment bank Goldman Sachs raised its 12-month target price to $700.

The U.S. New York stock market had reached record highs on the previous trading day, February 2, with the Dow Jones Industrial Average and S&P 500 rising 0.35% and 1.07%, respectively, but turned bearish in one day following comments from Chair Powell and Fed officials.

Chair Powell appeared on CBS in the U.S. the previous day and said, "We want to see more evidence that inflation is steadily declining toward 2%," adding, "Our confidence is increasing. We just want more confidence before taking the very important step of starting rate cuts." This reaffirmed the stance he expressed at the Federal Open Market Committee (FOMC) meeting on January 31. At that time, Powell said, "I think it is unlikely that we will reach a level of confidence to be sure about a rate cut by the March meeting."

Fed officials echoed Powell's views on the same day. Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, wrote on the Fed's website on the 5th (local time) that due to the possibility of a rise in the 'neutral rate,' there is no need for the Fed to start cutting rates early. He stated, "It is possible that the neutral rate has risen at least during the recovery period after the pandemic," and argued, "The FOMC should allow time to assess incoming economic data before starting to cut the federal funds rate."

Austan Goolsbee, President of the Federal Reserve Bank of Chicago, also said in an interview with Bloomberg TV on the same day, "We have received quite good inflation reports near or even below the Fed's target over the past seven months," adding, "So if we continue to get data like this, I believe we should be on the path to normalization." This was interpreted as supporting Powell's claim that further confirmation of inflation slowdown is needed.

Earlier U.S. employment data also confirmed signs that the labor market remains hot. According to the U.S. Department of Labor, nonfarm payrolls increased by 353,000 in January compared to the previous month, more than double the expert forecast of 185,000, marking the largest increase in a year.

As a result, expectations for the timing of Fed rate cuts have been pushed back. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the current futures market reflects about a 16% chance that the Fed will cut rates by 0.25 percentage points at the March FOMC meeting, down significantly from 20% the day before and 64% a month ago. The probability of the Fed cutting rates by 0.5 percentage points or more in May has dropped to the 62% range from 73% the previous day and 95% a month ago.

Case Lerner, Co-Chief Investment Officer (CIO) at Truist, said, "This is a recalibration of expectations about how quickly the Fed will pivot," adding, "The pivot expectations are being somewhat unwound. There is likely to be continued tension between a strong economy and what that means for the Fed, which could sustain this market environment."

James Rositer, Head of Global Macro Strategy at TD Securities, said, "There is still a lot of uncertainty about how quickly they (the Fed) will cut rates," adding, "This week is a quiet week for data releases, so we plan to watch the central bank very closely."

With expectations that the current interest rate level of 5.25-5.5% may persist for a long time, bond yields are surging. The yield on the U.S. 10-year Treasury note, a global bond yield benchmark, rose 13 basis points (1 bp = 0.01 percentage points) from the previous trading day to around 4.16%. The 2-year U.S. Treasury yield increased 10 basis points to about 4.47%.

International oil prices are rising. Concerns about supply constraints due to escalating tensions in the Middle East and the prolonged Russian invasion of Ukraine are at play. West Texas Intermediate (WTI) crude oil rose $0.50 (0.7%) to $72.78 per barrel, and Brent crude increased $0.66 (0.9%) to $78.22 per barrel.