Fed Officials Advocate for Gradual and Moderate Rate Cuts
Bond Yields Rise Amid Indications of Slower Rate Reduction
Focus on Tesla Earnings on 23rd, Amazon on 24th
The three major indices of the U.S. New York stock market were in a downward trend in early trading on the 22nd (local time). This was due to the rapid rise in Treasury yields the previous day, following Federal Reserve (Fed) officials hinting at a slowdown in the pace of interest rate cuts amid expectations of a soft landing for the U.S. economy. Investors are awaiting earnings reports from companies such as Tesla and Amazon.
As of 9:38 a.m. in the New York stock market on the day, the Dow Jones Industrial Average, centered on blue-chip stocks, was trading at 42,785.49, down 0.34% from the previous trading day. The S&P 500 index, focused on large-cap stocks, was down 0.5% at 5,824.98, and the Nasdaq index, centered on technology stocks, was trading 0.45% lower at 18,457.24.
By individual stocks, Nvidia, the AI leader that hit an all-time high the previous day, was down 0.18%. 3M rose 2.6% after reporting earnings that exceeded expectations. The Cheesecake Factory was down 0.12% after activist investor JCP Investment Management purchased shares and demanded the spinoff of some brands.
The sharp rise in Treasury yields the previous day weighed on investor sentiment. The U.S. 10-year Treasury yield, a global bond yield benchmark, was slightly up at 4.18% compared to the previous trading day, while the 2-year Treasury yield, sensitive to monetary policy, was trading around 4.03%. On the 18th, these yields were 4.07% and 3.95%, respectively, but surged by 11 basis points and 7 basis points the previous day amid expectations that the Fed would slow the pace of rate cuts.
Comments from Fed officials led to the rise in Treasury yields. Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, attending an event in Wisconsin the previous day, said, "I expect a more gradual pace of rate cuts over the next few quarters to reach a neutral (rate) level," adding that for the pace of rate cuts to accelerate, "there must be substantial evidence that the labor market is weakening rapidly." Dallas Fed President Lorie Logan also stated at an event in New York on the same day, "If the economy moves as expected, a strategy of gradually lowering the policy rate to a more normal or neutral level will help manage risks and achieve goals." She reiterated the Fed's stance that rate cuts should be made cautiously. Analysts interpret these remarks as Fed officials signaling the need to moderate the pace of rate cuts amid ongoing signs of strong labor market and consumer strength supporting U.S. economic growth last month.
The market expects the Fed's rate cut next month to be 0.25 percentage points rather than 0.5 percentage points. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market reflects a 91% probability that the Fed will cut rates by 0.25 percentage points in November, a sharp increase from 49.6% a month ago. The probability of a 0.5 percentage point cut next month has dropped from 50.4% to 0% during the same period.
Investors are also focusing on major corporate earnings reports released this week. Tesla will report on the 23rd, and Amazon on the 24th. Companies reporting earnings this week account for about 20% of S&P 500 firms. According to market research firm FactSet, 14% of S&P 500 companies have reported so far, with 70% of those beating market expectations. The direction of the stock market is expected to be influenced by upcoming corporate earnings announcements.
International oil prices are rising on expectations of China's economic stimulus measures and instability in the Middle East. West Texas Intermediate (WTI) crude oil rose $0.66 (0.92%) to $74.97 per barrel compared to the previous trading day, while Brent crude, the global oil price benchmark, increased by $0.68 (0.92%) to $74.97 per barrel.
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