New York Stock Market Falls on Rate Cut Retreat Outlook... Tesla Down 5.81%

Unexpected Expansion in Manufacturing Sector Weakens Pivot Expectations
Tesla Falls on Disappointing Q1 Electric Vehicle Deliveries
Focus on March Employment Report

The three major indices of the U.S. New York stock market showed a downward trend in the early trading hours on the 2nd (local time). Disappointment was reflected as the manufacturing sector unexpectedly expanded last month, suggesting that the Federal Reserve's (Fed) timing for interest rate cuts might be delayed. Investors are awaiting the U.S. Labor Department's March employment report, which will be released on the 5th.

As of 9:30 a.m. at the New York Stock Exchange (NYSE) on the day, the Dow Jones Industrial Average was trading at 39,223.13, down 0.87% from the previous session. The large-cap focused S&P 500 index was down 0.89% at 5,197.09, and the tech-heavy Nasdaq index was down 1.2% at 16,199.75.

Investor sentiment froze as the U.S. manufacturing sector in March turned out to be much stronger than market expectations. According to the Institute for Supply Management (ISM) on the previous day, the March Manufacturing Purchasing Managers' Index (PMI) was 50.3, surpassing both the previous month’s 47.8 and the expert forecast of 48.5. A PMI above 50 indicates expansion, while below 50 indicates contraction. This is the first time in one and a half years since September 2022 that the U.S. manufacturing PMI compiled by ISM has entered an expansion phase. Increases in production and new orders led the manufacturing sector's expansion.

The expansion in U.S. manufacturing raises the possibility of an upward revision in the first quarter gross domestic product (GDP) growth rate. The Atlanta Federal Reserve Bank, through its 'GDP Now' model, projected the U.S. real GDP growth rate for Q1 this year at 2.8%, an increase of 0.5 percentage points from the forecast on the 29th of last month. Although GDP Now is not the official forecast of the Atlanta Fed, it is used as a reference for future economic trends.

The surprising rebound in U.S. manufacturing could exert inflationary pressure, leading to market speculation that the Fed's timing for interest rate cuts might be postponed. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market on the day priced in about a 59% chance that the Fed will cut rates by 0.25 percentage points at the June Federal Open Market Committee (FOMC) meeting, down from over 70% a week ago. While the expectation for a June rate cut remains significant, some investors have begun to withdraw their bets on June.

U.S. Treasury yields are rising. The benchmark 10-year U.S. Treasury yield increased by 6 basis points (1bp = 0.01 percentage points) to 4.38%, while the 2-year Treasury yield, sensitive to monetary policy, moved slightly higher to around 4.72%.

Jose Torres, Senior Economist at Interactive Brokers, said, "Investors are moving in anticipation that the Fed might pivot to a more hawkish stance (favoring monetary tightening)," adding, "The Fed's first rate cut could occur in the second half of this year."

The previously released February inflation rate met market expectations. The core Personal Consumption Expenditures (PCE) price index for February rose 2.8% year-over-year, matching expert forecasts and slightly lower by 0.1 percentage points than January's 2.9% increase. Fed Chair Jerome Powell commented on the inflation data released on the 29th of last month, saying, "It is a good thing that the data came out as expected," but also noted, "There is no need to rush rate cuts."

With February's PCE inflation not deviating from forecasts and manufacturing unexpectedly expanding, investors are now focusing on the March employment report to be released on the 5th. The market expects nonfarm payrolls to have increased by 205,000 last month, a significant decrease from February's 275,000. The unemployment rate for March is expected to remain steady at 3.9%, the same as February. If strong employment continues amid persistent inflation, the likelihood of rate cuts diminishes. Conversely, if employment slows, expectations for rate cuts may revive.

On the day, the U.S. Labor Department will release the February Job Openings and Labor Turnover Survey (JOLTS), and on the 3rd, the private employment data for March from ADP, a private employment information company, will be announced.

Additionally, speeches by Fed officials including Michelle Bowman, Fed Governor; John Williams, President of the New York Fed; Loretta Mester, President of the Cleveland Fed; and Mary Daly, President of the San Francisco Fed, are scheduled, which are expected to provide hints about the future path of interest rates.

By individual stocks, Tesla is down 5.81% due to weak electric vehicle delivery performance in Q1. U.S. apparel company PVH, which owns Calvin Klein and Tommy Hilfiger, is down 21.25% after issuing weak Q1 and annual sales guidance. Humana and UnitedHealth are down 9.86% and 6.06%, respectively.

International oil prices are strong amid supply concerns due to production cuts by oil-producing countries. West Texas Intermediate (WTI) crude oil rose $1.34 (1.6%) to $85.05 per barrel. Brent crude rose $1.24 (1.42%) to $88.66 per barrel.