[New York Stock Market] Mixed Reactions to Unexpected Manufacturing Expansion in March... Sharp Rise in Treasury Yields

ISM March Manufacturing PMI 50.3... Expansion After 16 Months
10-Year Treasury Yield Rises 13bp Amid Rate Cut Retreat Outlook
Focus on March Employment Report Released on 5th

The three major indices of the U.S. New York stock market closed mixed on the first trading day of the second quarter, April 1 (local time). Stronger-than-expected U.S. manufacturing activity raised expectations that the Federal Reserve (Fed) may not rush to cut interest rates, causing a sharp rise in Treasury yields and weighing on the indices. The market is closely watching the U.S. Labor Department's March employment report scheduled for release on April 5.

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On the day at the New York Stock Exchange (NYSE), the blue-chip-focused Dow Jones Industrial Average fell 240.52 points (0.6%) from the previous trading day to close at 39,566.85. The large-cap-focused S&P 500 index dropped 10.58 points (0.2%) to finish at 5,243.77. The tech-heavy Nasdaq index rose 17.37 points (0.11%) to close at 16,396.83.

The U.S. manufacturing sector in March was much stronger than market expectations, dampening investor sentiment. The Institute for Supply Management (ISM) reported that the manufacturing Purchasing Managers' Index (PMI) for March stood at 50.3. This was above both the previous month’s 47.8 and the experts’ forecast of 48.5. A PMI above 50 indicates expansion, while below 50 signals contraction. This is the first time in one and a half years, since September 2022, that the ISM manufacturing PMI has entered expansion territory. Growth in production and new orders drove the manufacturing sector’s expansion.

Timothy Fiore, chairman of the ISM manufacturing survey committee, said, "Demand is still in the early stages of recovery, and there are clear signs of improvement," adding, "As companies re-enter the expansion phase, production surged compared to January and February." He further explained, "Customer inventory levels decreased at a faster pace in March, and companies reported ongoing inventory shortages among their customers," which is considered a positive factor for future new orders and production.

With the unexpected expansion in the U.S. ISM manufacturing sector last month, there are growing views that the Fed’s timing for interest rate cuts may be delayed. While the market largely expects the Fed to cut rates in June, some investors have begun to withdraw their bets on June cuts. According to the Chicago Mercantile Exchange (CME) FedWatch tool, federal funds futures on the day priced in about a 58% chance of a 0.25 percentage point rate cut at the June Federal Open Market Committee (FOMC) meeting, down from over 70% a week ago.

Amid the possibility of delayed rate cuts, Treasury yields have surged. The U.S. 10-year Treasury yield, a global bond yield benchmark, rose 12 basis points (1bp = 0.01 percentage points) from the previous trading day to 4.31%, while the 2-year Treasury yield, sensitive to monetary policy, increased 9 basis points to around 4.71%.

Jose Torres, senior economist at Interactive Brokers, said, "Investors are moving in anticipation that the Fed may pivot toward a more hawkish stance (favoring monetary tightening)," and predicted, "The Fed’s first rate cut could occur in the second half of this year."

Earlier, on March 29, inflation data released on Good Friday matched market expectations. The February Personal Consumption Expenditures (PCE) price index rose 2.5% year-over-year, in line with forecasts. This was 0.1 percentage points higher than January’s 2.4%. The core PCE price index, which excludes volatile food and energy prices and reflects underlying inflation trends, increased 2.8% from a year earlier. This also met market expectations and was 0.1 percentage points lower than January’s 2.9% rise.

Fed Chair Jerome Powell commented on February’s PCE inflation on March 29, saying, "It’s a good thing that the data came in as expected," but added, "There is no need to rush rate cuts."

The market is focusing on the upcoming employment data this week, given that February’s PCE inflation did not deviate from expectations and manufacturing showed unexpected expansion. The key report is the March employment report from the U.S. Labor Department, due on April 5. If solid employment continues amid only modest declines in inflation, the likelihood of rate cuts will diminish. The market expects nonfarm payrolls to increase by 205,000 in March, down significantly from 275,000 in February. The unemployment rate for March is forecasted to remain steady at 3.9%, the same as in February.

Prior to that, on April 2, the U.S. Labor Department will release the February Job Openings and Labor Turnover Survey (JOLTS), and on April 3, private employment data for March from ADP, a private employment data provider, will be published.

On April 3, Fed Chair Powell is also scheduled to make further remarks.

Among individual stocks, Trump Media & Technology Group (TMGT), the parent company of Truth Social, a social networking service founded by former U.S. President Donald Trump, plunged 21.47% after reporting an annual net loss last year. U.S. telecom company AT&T fell 0.57% due to a customer data breach incident. UPS dropped 0.68% despite news that it was selected as a major air cargo carrier by the U.S. Postal Service. Micron and Delta Air Lines rose 5.44% and 0.73%, respectively, following target price upgrades.

International oil prices rose due to expectations of increased demand from the U.S. and China, production cuts by oil-producing countries, and geopolitical uncertainties. West Texas Intermediate (WTI) crude oil closed at $83.71 per barrel, up $0.54 (0.7%), marking the highest level since October 27 last year. Brent crude for June delivery rose $0.42 (0.5%) to close at $87.42 per barrel.