Stronger Employment Data Dims Rate Cut Prospects Last Month
U.S. 10-Year Treasury Yield Surges Above 4.7% as Dollar Rises
Focus on December CPI to Be Released on the 15th
International Oil Prices Hit 5-Month High on U.S. Sanctions Against Russia
The three major indices of the U.S. New York Stock Exchange showed mixed trends in the early trading session on the 13th (local time). Following the release of stronger-than-expected U.S. employment data at the end of last week, expectations for interest rate cuts diminished, leading to a deterioration in investor sentiment, particularly in technology stocks. Treasury yields surged past 4.7%, and the value of the U.S. dollar also rose.
As of 9:41 a.m. in the New York stock market, the Dow Jones Industrial Average (Dow) focused on blue-chip stocks was up 0.04% from the previous day, standing at 41,957.18. The S&P 500, centered on large-cap stocks, fell 0.86% to 5,776.7, and the tech-heavy Nasdaq dropped sharply by 1.66% to 18,844.35.
Strong U.S. employment data from December last year weighed on the stock market. According to the employment report released by the U.S. Department of Labor on the 10th, nonfarm payrolls increased by 256,000 last month. This significantly exceeded both the market forecast of 164,000 and the previous month's figure of 212,000. The unemployment rate fell from 4.2% in November to 4.1%. While the market had expected the unemployment rate to remain at 4.2%, it declined.
Although a robust U.S. labor market is positive for the economy, the outlook that the Federal Reserve (Fed) will delay additional interest rate cuts this year acted as a negative factor for the stock market. The probability of a 25 basis point (1bp = 0.01 percentage point) rate cut by the Fed in the first quarter, as reflected in the federal funds futures market, has halved from 40.1% a week ago to 21.6% currently.
Wall Street investment banks (IBs) have also downgraded their rate cut forecasts. After the employment data release, JP Morgan, Goldman Sachs, Citigroup, and Barclays postponed the timing of the Fed's first rate cut this year from the first quarter to the second quarter. JP Morgan and Goldman Sachs reduced their expected number of rate cuts this year from three to two, while Barclays cut its forecast from two to one. Bank of America (BoA) revised its previous forecast of two rate cuts to a view that the Fed will keep rates steady this year.
The strong employment data caused bond yields, which had recently surged sharply, to spike further, putting additional pressure on the stock market. The 10-year U.S. Treasury yield, a global bond yield benchmark, currently stands at 4.76%, and the 2-year Treasury yield, sensitive to monetary policy, is at 4.39%. Both have risen significantly compared to the beginning of the year levels of around 4.5% and 4.2%, respectively.
The dollar index, which measures the value of the U.S. dollar against the currencies of six major countries, rose 0.45% from the previous trading day to 109.49.
Catherine Nixon, Chief Investment Officer (CIO) at Northern Trust, diagnosed, "Currently, inflation and inflation expectations are rising and becoming sticky, causing bond yields to rise sharply," adding, "Stock investors' caution is beginning to increase further."
The market is focusing on inflation indicators to be released this week. Amid concerns about 'Trumflation' (inflation caused by Trump's policies), recent inflation rebounds have increased the likelihood that the Fed will keep rates steady for the time being. On the 14th, the Producer Price Index (PPI) for December last year will be released, followed by the Consumer Price Index (CPI) on the 15th. The CPI, a key indicator along with the Personal Consumption Expenditures (PCE) price index, is expected to have risen 2.9% last month, surpassing the previous month's figure of 2.7%. On the same day, the New York Federal Reserve Bank is scheduled to announce inflation expectations.
This week also marks the start of the fourth-quarter corporate earnings season. Citigroup, Goldman Sachs, and JP Morgan will report earnings on the 15th, while Morgan Stanley and BoA are scheduled to announce results on the 16th.
By individual stocks, technology shares are declining. Palantir, an artificial intelligence (AI) software company, is down 3.69%. Tesla is falling 2.5%. Semiconductor stocks are also plunging following news that the Biden administration, with just over a week before its term ends, will restrict exports of U.S.-made AI semiconductors to China, Russia, and other countries except about 20 allied nations. Nvidia is down 3.58%, and Micron has dropped 5.81%.
International oil prices are rising on news that the U.S. is expanding sanctions on Russian crude oil. West Texas Intermediate (WTI) crude oil is trading at $77.51 per barrel, up $0.94 (1.2%) from the previous day, and Brent crude, the global oil price benchmark, is up $0.71 (0.9%) to $80.47 per barrel. Both are at their highest levels since August last year.
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