[New York Stock Market] Decline Amid Stagflation Fears... 2-Year Treasury Yield Surpasses 5%

Q1 GDP 1.6% 'Below Expectations'
Core PCE Inflation Up 3.7%... Exceeds Forecast
Pivot Delay Weighed... 2-Year US Treasury Yield Hits 5% Intraday
MS & Alphabet Surprise Earnings Boost After-Hours Trading

The three major indices of the U.S. New York stock market all closed lower on the 25th (local time). While the U.S. first-quarter growth rate fell significantly short of expectations, inflation rose, raising concerns about 'stagflation' (economic slowdown amid rising prices), which dampened investor sentiment. Due to persistent inflation and expectations that the Federal Reserve's (Fed) rate cut timing will be further delayed, the yield on the 2-year Treasury note briefly surpassed 5% during the session.

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On that day at the New York Stock Exchange (NYSE), the blue-chip-focused Dow Jones Industrial Average closed at 38,085.8, down 375.12 points (0.98%) from the previous trading day. The large-cap-focused S&P 500 index fell 23.21 points (0.46%) to 5,048.42, and the tech-heavy Nasdaq index dropped 100.99 points (0.64%) to close at 15,611.76.

According to the U.S. Bureau of Economic Analysis (BEA) on the same day, the preliminary estimate of real Gross Domestic Product (GDP) growth for the first quarter of this year was 1.6% quarter-on-quarter (annualized). This marked a significant slowdown compared to the revised figure of 3.9% in the fourth quarter of last year and was well below expert forecasts (Bloomberg 2.5%, Wall Street Journal (WSJ) 2.4%). The slowdown in consumer and government spending contributed to the decline in GDP growth. Consumer spending, which accounts for two-thirds of the U.S. economy, increased by 2.5% in the first quarter, falling short of market expectations of 3%.

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

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 of 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."

Despite signs of economic cooling due to the Fed's cumulative aggressive tightening, prices have increased, spreading stagflation concerns in the market. Jim Beard, CIO of Plante Moran Financial Advisors, said, "The combination of slowing growth and sticky inflation undoubtedly increases whispers of potential stagflation risk," adding, "This will potentially make the Fed's mission more complicated."

The data released that day also strengthened expectations that the Fed's rate cuts will be delayed. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market reflected a 32% 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 44% the previous day. The probability of a rate cut of at least 0.25 percentage points in September fell from the previous day's 69% to 59%.

U.S. Treasury yields rose. The 2-year Treasury yield, sensitive to monetary policy, briefly surpassed 5% during the session and is currently at 4.99%, up 5 basis points (1bp=0.01 percentage points) from the previous trading day. The 10-year U.S. Treasury yield, a global bond yield benchmark, moved around 4.7%, up 5 basis points. Both the 2-year and 10-year yields are at their highest levels since November last year.

Bill Gross, known as Wall Street's 'original bond king,' advised avoiding U.S. Treasuries and tech stocks and investing in value stocks. Gross stated on social media platform X (formerly Twitter), "Now is the time to avoid tech stocks and stick to value stocks." Quoting lyrics from the American classic 'American Pie,' he wrote, "The day the music died," adding, "The 10-year U.S. Treasury yield is moving to 4.75%. Why hold bonds?"

However, U.S. Treasury Secretary Janet Yellen said in an interview with foreign media that "the first-quarter growth rate could be revised higher, and inflation will ease to a more normal level."

U.S. employment also appeared robust. According to the U.S. Department of Labor, new unemployment claims for the week of April 14-20 totaled 207,000, the lowest level in two months. Claims decreased from 212,000 the previous week and were below expert forecasts of 214,000.

Big tech earnings released after the market close exceeded expectations. Microsoft (MS) and Alphabet, Google's parent company, reported results surpassing market forecasts, causing their shares to rise in after-hours trading. MS reported third-quarter fiscal year revenue of $61.86 billion and earnings per share (EPS) of $2.94, exceeding expert forecasts from LSEG ($60.8 billion revenue, EPS $2.82). Alphabet reported first-quarter revenue of $80.54 billion and EPS of $1.89, also beating LSEG market expectations ($78.59 billion revenue, EPS $1.51). Additionally, Alphabet announced it would pay a dividend of 20 cents per share for the first time. MS, which fell 2.45% during regular trading, rose 5.4% in after-hours trading. Alphabet, which dropped 1.96% in regular trading, is up more than 11.8% in after-hours trading.

Meta, which had issued a disappointing second-quarter revenue forecast the previous day, fell 10.56%. American Airlines Group rose 1.51% after announcing that its second-quarter earnings outlook would exceed Wall Street expectations.

International oil prices rose due to intensified Israeli airstrikes on Rafah and remarks by Treasury Secretary Janet Yellen that the U.S. economy remains robust. West Texas Intermediate (WTI) crude oil closed at $83.57 per barrel, up $0.76 (0.9%) from the previous trading day, while Brent crude, the global oil price benchmark, ended at $89.01 per barrel, up $0.99 (1.1%).