[New York Stock Market] Decline on US Wholesale Prices Exceeding Expectations... Rise in Treasury Yields

February PPI Exceeds Forecast for Second Consecutive Month
10-Year Treasury Yield Rises 10bp
WTI Surpasses $80 on Upward Oil Demand Outlook

The three major indices of the U.S. New York stock market all closed lower on the 14th (local time) due to persistently high inflation exceeding expectations. The February Producer Price Index (PPI), a wholesale price indicator, surpassed market forecasts, and rising government bond yields dampened investor sentiment. The decline of Nvidia, a leading AI stock, also weighed on the market. There is growing speculation that concerns over the Federal Reserve's (Fed) interest rate cuts may persist for some time due to rising inflation.

[Image source=Yonhap News]

On that day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average, which focuses on blue-chip stocks, closed at 38,905.66, down 137.66 points (0.35%) from the previous trading day. The S&P 500, centered on large-cap stocks, fell 14.83 points (0.29%) to 5,150.48, and the Nasdaq dropped 49.24 points (0.3%) to close at 16,128.53.

Among the mixed economic indicators released that day, wholesale prices attracted the most investor attention as they exceeded market expectations for the second consecutive month. The market initially rose after the inflation data release but soon shifted to a downward trend.

According to the U.S. Department of Labor, the February PPI rose 0.6% month-over-month and 1.6% year-over-year. This significantly exceeded market forecasts of 0.3% and 1.1%, respectively, and also surpassed the January increases of 0.3% and 1.0%. The core PPI, which excludes volatile energy and food prices to show the underlying inflation trend, increased 0.3% month-over-month and 2.0% year-over-year, also exceeding market expectations of 0.2% and 1.9%. The previous month's increases were 0.5% and 2.0%, respectively.

The wholesale price index, PPI, affects the retail price index, CPI, with a time lag. Following the CPI release on the 12th, the PPI also exceeded market expectations, leading to analyses that suggest it will be difficult to pass the "last mile" (the final stretch before reaching the target) in the fight against inflation. It is expected that the Fed will maintain a cautious stance on early rate cuts at the Federal Open Market Committee (FOMC) meeting scheduled for the 19th-20th.

According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market on that day priced in a 62.8% chance that the Fed will cut rates by at least 0.25 percentage points at the June FOMC meeting, slightly down from 65.2% the previous day.

As expectations that the Fed will maintain a cautious stance on rate cuts grow, government bond yields have risen. The U.S. 10-year Treasury yield, a global bond yield benchmark, rose 10 basis points (bp) to 4.29%, while the 2-year Treasury yield increased 7 bp to 4.69%.

Thierry Wiseman, Global FX and Rates Strategist at Macquarie, said, "If you ask whether bond yields will continue to rise and whether there will be a bigger market drop, my answer is yes to both." Chris Larkin, Managing Director of Trading at Morgan Stanley e-Trade, diagnosed, "The current question is how quickly the Fed will cut rates and whether that will slow the stock market rally. So far, the market has underestimated concerns about stubborn inflation and a cautious Fed."

The U.S. labor market remains robust. The U.S. Department of Labor reported that initial jobless claims for the week of March 3-9 totaled 209,000, below the forecast of 218,000. This is a slight decrease compared to the revised 210,000 claims the previous week. Initial jobless claims, which reflect corporate layoffs, have hovered around 200,000 since mid-September last year. Compared to the pre-COVID-19 pandemic period, this remains a historically low level. However, continuing jobless claims increased. The number of continuing claims, representing those applying for unemployment benefits for at least two weeks, was 1,811,000 for the week of February 25 to March 2, up 17,000 from the revised previous week.

On the other hand, the February retail sales growth rate fell short of expectations, showing mixed economic signals. According to the U.S. Department of Commerce, retail sales in February increased by 0.6% month-over-month, below the market forecast of 0.8%. Retail sales excluding automobiles rose by 0.3%. The January retail sales growth was revised down from a 0.8% increase to a 1.1% decrease month-over-month. This suggests that household spending capacity was not as strong as initially expected. Retail sales are considered a key indicator of the overall economic trend, accounting for two-thirds of the U.S. real economy.

Chris Lo, Chief Economist at FHN Financial, assessed, "One week before the FOMC, after two consecutive months of hot CPI readings, February PPI also exceeded market expectations for two months in a row, while retail sales were not completely weak but quite disappointing."

Bloomberg reported, "It is too early to draw conclusions, but some are raising eyebrows over fears of stagflation (economic stagnation with rising inflation)."

Now, investors' attention is turning to the FOMC meeting next week. Due to stickier-than-expected inflation, the Fed is likely to maintain the view that additional confirmation of a sustained slowdown in inflation is necessary.

By stock, Nvidia fell 3.24%. Electric vehicle startup Fisker plunged 51.94% after news that it hired restructuring experts in preparation for bankruptcy filing. Apple and Microsoft (MS) rose 1.09% and 2.44%, respectively. Investment platform Robinhood jumped 5.19% on news that its assets under management increased by 16%.

International oil prices rose as the International Energy Agency (IEA) raised its oil demand forecast for this year. West Texas Intermediate (WTI) crude closed at $81.26 per barrel, up $1.54 (1.9%) from the previous trading day, breaking above $80 for the first time since early November last year. Brent crude ended the day at $85.42 per barrel, up $1.39 (1.7%) from the previous day.