New York Stock Market Plummets on Stagflation Concerns... Nasdaq Down 1.9%

Q1 GDP 1.6% 'Below Expectations'
Core PCE Inflation Up 3.7%... Exceeds Forecast
Focus on Delayed Rate Cuts... 2-Year US Treasury Yield at 5%
MS and Alphabet Earnings Released After Market Close

The three major indices of the U.S. New York stock market all sharply declined in early trading on the 25th (local time). Investor sentiment weakened amid concerns about 'stagflation' (economic slowdown amid rising prices) following the release of U.S. first-quarter GDP and inflation data. The yield on the two-year Treasury note surpassed 5% on expectations that the timing of U.S. interest rate cuts will be delayed due to persistent inflation.

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As of 9:55 a.m. at the New York Stock Exchange (NYSE) on the day, the Dow Jones Industrial Average was down 1.73% from the previous close, trading at 37,794.56. The large-cap S&P 500 index fell 1.5% to 4,995.43, and the tech-heavy Nasdaq index dropped 1.98% to 15,401.33.

On the same day, the U.S. Bureau of Economic Analysis (BEA) announced that the preliminary estimate of real GDP growth for the first quarter of this year was 1.6% annualized compared to the previous quarter. This marked a significant slowdown from the revised 3.9% growth in the fourth quarter of last year and fell well short of expert forecasts (Bloomberg 2.5%, Wall Street Journal (WSJ) 2.4%). Slower growth in consumer and government spending dragged down GDP growth. Consumer spending, which accounts for two-thirds of the U.S. economy, increased by 2.5% in the first quarter, below market expectations of 3%.

On the other hand, inflation remained hot despite aggressive tightening. The core Personal Consumption Expenditures (PCE) price index, excluding food and energy, rose 3.7% in the first quarter, exceeding the expected 3.4%. Inflation in the services sector, excluding housing and energy, increased by 5.1%, doubling the rate from the previous quarter.

Despite signs of economic cooling due to the Federal Reserve's cumulative aggressive tightening, prices continued to rise, heightening stagflation concerns. Expectations that the central bank's rate cuts will be delayed due to persistent inflation have gained more weight. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market on the day priced in about a 30% chance that the Fed will cut rates by at least 0.25 percentage points at the July Federal Open Market Committee (FOMC) meeting, down from about 44% the previous day. The probability for a rate cut in September fell from about 69% the previous day to 58% on the day.

As a result, U.S. Treasury yields surged. The two-year Treasury yield, sensitive to monetary policy, rose 6 basis points (1 bp = 0.01 percentage points) from the previous trading day, surpassing 5%. The 10-year Treasury yield, a global benchmark for bond yields, increased 7 basis points to 4.72%, marking the highest level since November 2 of last year (intraday 4.749%).

Chris Zaccarelli, Chief Investment Officer (CIO) of Independent Advisor Alliance, said, "The Fed wants inflation to continue to decline, and the market wants to confirm economic growth and corporate earnings growth." He analyzed, "This report is the worst in both aspects: slowing economic growth and persistent inflationary pressures." He added, "Neither inflation nor growth is moving in the right direction. This is bad news for the market."

Following Meta, the parent company of Facebook, releasing earnings the previous day, tech stocks also showed a weak trend. Although Meta posted better-than-expected first-quarter results, its second-quarter revenue forecast fell short of market expectations. The outlook for increased capital spending on artificial intelligence (AI) dampened investor sentiment. While tech stocks benefited from the generative AI boom, the market has begun to question the monetization prospects, according to evaluations.

Thierry Wiseman, Global FX and Rates Strategist at Macquarie, said, "Despite the focus on generative AI over the past nine months, Meta has left questions about whether this technology can be monetized."

Market attention is turning to Microsoft (MS) and Alphabet, which are releasing earnings on the day. Next week, Apple and Amazon will report earnings, followed by Nvidia next month.

By stock, Meta is plunging 13.27%. MS and Alphabet, which are reporting earnings on the day, are down 4.42% and 4.03%, respectively. American Airlines Group is down 1.69% despite stating that its second-quarter earnings outlook will exceed Wall Street expectations.

International oil prices are weak following indicators showing a slowdown in U.S. economic growth. West Texas Intermediate (WTI) crude oil fell $0.48 (0.58%) to $82.33 per barrel, and Brent crude, the global benchmark, dropped $0.46 (0.52%) to $87.56 per barrel.