[New York Stock Market] Decline Ahead of Wage-Driven Inflation and FOMC... 2-Year US Treasury Yield Surpasses 5%

Q1 Employment Cost Index Up 1.2% 'Exceeds Expectations'
Inflation Concerns Spread Ahead of Next Day FOMC
'Surprise Earnings' Amazon Up 0.9% in After-Hours

The three major indices of the U.S. New York stock market all closed lower on the 30th (local time). Investor sentiment weakened amid growing inflation concerns ahead of the Federal Open Market Committee (FOMC) interest rate decision the following day. The 2-year U.S. Treasury yield, which is sensitive to monetary policy, surpassed 5%, putting pressure on the indices.

On this day at the New York Stock Exchange (NYSE), the blue-chip-focused Dow Jones Industrial Average closed at 37,815.92, down 570.17 points (1.49%) from the previous trading day. The large-cap-focused S&P 500 index fell 80.48 points (1.57%) to 5,035.69, and the tech-heavy Nasdaq index dropped 325.26 points (2.04%) to close at 15,657.82.

By stock, Amazon rose about 0.9% in after-hours trading following an earnings report that exceeded market expectations. Amazon announced first-quarter sales of $143.3 billion and earnings per share (EPS) of $0.98, surpassing analyst estimates. Previously, LSEG had forecast Amazon’s first-quarter sales and EPS at $142.5 billion and $0.83, respectively. Amazon had fallen 3.29% during regular trading hours. McDonald’s declined 0.14% after reporting earnings below market expectations. Coca-Cola fell 0.44% despite reporting earnings that beat analyst forecasts and optimistic earnings guidance for the year.

On this day, U.S. employment costs rose faster than market expectations in the first quarter, fueling inflation concerns. According to the U.S. Department of Labor, the Employment Cost Index (ECI) for Q1 increased 1.2% quarter-over-quarter, exceeding both the 0.9% rise in Q4 of last year and the 1.2% analyst forecast.

Concerns that stronger-than-expected employment costs could drive up inflation caused market expectations for rate cuts to retreat. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market priced in over a 51% chance that the Fed will hold the benchmark interest rate steady at the September FOMC meeting, up from the previous day’s 42%. The probability of a rate hold in November also rose from the low 30% range to the 40% range on the same day.

Following the March core Personal Consumption Expenditures (PCE) price index rising 2.8% year-over-year?above the 2.6% forecast?and the increase in first-quarter employment costs, long-term Treasury yields rose amid expectations of prolonged high interest rates. The 2-year Treasury yield, sensitive to monetary policy, rose 6 basis points (bp) from the previous day to 5.04%, while the 10-year U.S. Treasury yield, a global bond benchmark, increased 7 bp to around 4.68%.

Jose Torres, Senior Economist at Interactive Brokers, assessed, "This morning’s (employment cost) data increasingly justify a more hawkish (monetary tightening-preferred) committee."

[Image source=Yonhap News]

The market is closely watching the two-day FOMC meeting starting today. The Fed is widely expected to maintain the benchmark interest rate at the current 5.25?5.5%, the highest level in 23 years, at the meeting the next day. The key point to watch is how hawkish Chairman Powell’s message will be. Although the Fed maintained its forecast for three rate cuts this year at last month’s FOMC, the market is increasingly expecting only one cut or even no cuts within the year. Some speculate that Chairman Powell might mention the possibility of raising rates again.

On May 3, the U.S. Department of Labor will release the April employment report. If strong employment continues amid stronger-than-expected inflation, the timing of rate cuts is likely to be further delayed. The market expects nonfarm payrolls to increase by 243,000 in April, a significant drop from March’s 303,000. The unemployment rate for April is forecast to remain steady at 3.8%.

International oil prices fell due to increased U.S. crude oil production and hopes for progress in ceasefire negotiations between Israel and the Palestinian militant group Hamas. West Texas Intermediate (WTI) crude closed at $81.93 per barrel, down $0.70 (0.9%) from the previous day, while Brent crude, the global benchmark, fell $0.54 (0.6%) to $87.86 per barrel.