[New York Stock Market] Broad Decline Amid Inflation Concerns... 10-Year Treasury Yield Threatens 4.7%

Service Sector PMI at 54.1 in December Last Year 'Exceeds Expectations'
Service Sector Price Index Hits 2-Year High
10-Year Treasury Yield at 8-Month High Amid Inflation Concerns
Rate Freeze Expected in First Half...NVIDIA Down 6.2%

The three major indices of the U.S. New York Stock Exchange all closed lower on the 7th (local time). Inflation concerns reignited due to strong service sector performance, and the U.S. 10-year Treasury yield surged to its highest level in over eight months, threatening 4.7%, putting pressure on investor sentiment. Market speculation suggests that the Federal Reserve (Fed) may keep the benchmark interest rate unchanged throughout the first half of the year.

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On this day in the New York stock market, the Dow Jones Industrial Average, which focuses on blue-chip stocks, closed at 42,528.36, down 178.2 points (0.42%) from the previous trading day. The S&P 500, centered on large-cap stocks, fell 66.35 points (1.11%) to 5,909.03, and the Nasdaq, focused on technology stocks, plunged 375.3 points (1.89%) to close at 19,489.68.

The service sector economic indicator released that day showed stronger-than-expected performance, dragging down the stock market. According to the Institute for Supply Management (ISM), the service sector Purchasing Managers' Index (PMI) for December last year was 54.1, surpassing both the previous month’s 52.1 and expert forecasts of 53.5. A reading above 50 indicates economic expansion, while below 50 indicates contraction, confirming an acceleration in service sector growth. The non-manufacturing price index, a sub-index of the service sector PMI, rose from 58.2 in November to 64.4 in December. This exceeded market expectations (57.5) and marked the highest level since early 2023. Among the 19 service industries, 15 saw rising prices paid, fueling inflation concerns. Pantheon Macroeconomics analyzed, "This indicator suggests that service sector disinflation (a slowdown in price increases) has stalled."

Following the service sector data release, expectations for Fed rate cuts diminished, causing bond yields to surge. The U.S. 10-year Treasury yield, a global bond yield benchmark, rose 8 basis points (1bp = 0.01 percentage points) to 4.69%, reaching its highest level in over eight months since late April last year. The yield on the U.S. 2-year Treasury, sensitive to monetary policy, moved up 2 basis points to 4.29%.

Market expectations for a rate freeze in the first half of the year also increased. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market reflected a 95.2% probability that the Fed will keep rates unchanged at the Federal Open Market Committee (FOMC) meeting scheduled for the 28th-29th of this month, up from 90.4% a week ago. The likelihood of maintaining current rates through March and May stands at approximately 60% and 50%, respectively, while the probability of a freeze through June exceeds 30%. These probabilities have all risen by about 10 percentage points compared to a week ago.

Tom Heinlein, Senior Investment Strategist at U.S. Bank Asset Management Group, said, "Inflation expectations and Fed rate outlooks are being recalibrated," adding, "This is triggering small-scale selling in the recently heated U.S. stock market."

Kenny Polcari, Senior Market Strategist at Slatestone Wealth, forecasted, "Rising Treasury yields do not necessarily spell trouble for the stock market, but if inflation rears its ugly head, it will become a problem."

Separately released employment data also showed strength. According to the U.S. Department of Labor’s Job Openings and Labor Turnover Survey (JOLTS), job openings in November last year reached 8.1 million, exceeding market expectations (7.73 million) and October’s figure (7.84 million). This is the highest level in six months since May (8.23 million). However, a more accurate picture of the labor market is expected from the December employment report to be released on the 10th. The market expects nonfarm payrolls to have increased by 154,000 in December, down from 227,000 in the previous month. The unemployment rate is forecast to remain steady at 4.2%. If nonfarm payrolls exceed market expectations, the Fed is more likely to keep rates steady, but if the figure falls significantly short, concerns about economic slowdown may increase, weighing on the stock market.

By individual stocks, technology shares plunged. Nvidia, which surged 3.43% the previous day to a record high following strong earnings from its partner Foxconn, fell 6.22% in one day, likely pressured by the sharp rise in Treasury yields. Jensen Huang, Nvidia’s CEO, announced at the opening keynote of CES 2025, the world’s largest electronics and IT exhibition, that the company is entering autonomous vehicles and robotics. Electric vehicle maker Tesla dropped 4.06% after Bank of America (BoA) downgraded its investment rating citing overvaluation and strategic risks. Apple fell 1.14%, and Microsoft (MS) declined 1.28%.