[New York Stock Market] Interest Rate Cut Expectations Drop Sharply After Employment Data Release... Dow Closes Down 1.63%

All Three Major U.S. Indices Plunge as Strong Jobs Data Dims Hopes for Further Rate Cuts
"Magnificent Seven" Tech Stocks Tumble; AI and Semiconductor Shares Also Slide

All three major indices on the New York Stock Exchange plummeted. The December U.S. nonfarm payroll data exceeded expectations, lowering hopes for additional interest rate cuts, which is interpreted as dampening investors' appetite for stock investments.

On the 10th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 41,938.45, down 696.75 points (1.63%) from the previous session. The Standard & Poor's (S&P) 500 index fell 91.21 points (1.54%) to 5,827.04, and the Nasdaq index dropped 317.25 points (1.63%) to close at 19,161.63.

The U.S. Department of Labor announced that nonfarm payrolls increased by 256,000 in December compared to the previous month. This result exceeded market expectations of 160,000 by nearly 100,000. It was also more than 40,000 higher than the revised figure of 212,000 for the previous month. The unemployment rate was 4.1%, below both the market expectation and the previous month's figure of 4.2%.

The release of stronger-than-expected employment data shocked the asset markets overall. The U.S. 2-year Treasury yield, which is sensitive to the Federal Reserve's monetary policy, surged by 12 basis points that day, and the dollar index jumped close to the 110 level during trading.

This is because the stronger-than-expected employment data weakened the rationale for the Fed to cut interest rates further. With inflation still persistent and the labor market heating up, further rate cuts by the Fed could increase inflationary pressures.

The stock market was swept up in this sentiment. Immediately after the December employment data release, stock index futures plunged nearly 1%, and this mood persisted throughout the trading session.

The "Magnificent Seven," referring to seven giant tech companies, all fell except for Meta. Apple dropped 2.41%, Nvidia fell 3.00%, and Microsoft (MS) and Amazon also recorded declines in the 1% range.

With expectations for rate cuts dashed, AI and semiconductor-related stocks also plunged en masse. Typically, a high-interest-rate environment is considered unfavorable for growth stocks. The Philadelphia Semiconductor Index plunged 2.42%. Among the 30 components of the index, only TSMC managed to hold steady with a slight gain, while all other stocks declined.

Additionally, JPMorgan Chase, Visa, and Coca-Cola fell by over 1%, while American Express and Goldman Sachs dropped more than 3%.

Scott Wren, Chief Global Market Strategist at Wells Fargo Investment Institute, said, "(The December employment data) is good news for the economy but at least for now, it is bad news for the stock market." He added, "Although December employment was higher than expected, our outlook that the labor market will slow down over the coming quarters remains unchanged."

Wall Street investment banks are revising their Federal Reserve rate path forecasts following the employment data. Bank of America (BofA) said in an investment note that "we believe the Federal Reserve's rate-cutting cycle is over" and "risks regarding the Fed's next move are tilted toward rate hikes." Goldman Sachs reduced its forecast for the number of rate cuts this year from three to two.

According to the Chicago Mercantile Exchange (CME) FedWatch tool, there is currently no betting in the federal funds futures market that the Fed will raise the benchmark interest rate this year. The probability of a 25 basis point rate hike at any of the eight Federal Open Market Committee (FOMC) meetings through December remains at 0%. However, the probability of a rate hold in January jumped to 97.3%, making a rate pause this month a foregone conclusion.

Meanwhile, according to the University of Michigan, the preliminary consumer sentiment index for January 2025 was 73.2, down 1.1% from 74.0 in December. On the other hand, the one-year expected inflation rate surged to 3.3%, up significantly from 2.8% the previous month, marking the highest level since May 2024. The five-year long-term expected inflation also rose from 3.0% to 3.3%, reaching its highest level in about 17 years since June 2008.