[New York Stock Market] Mixed Close on Surprise Employment and Inflation Pressure... US Treasury Yields Up, Tech Stocks Down

Stronger Employment Data Dims Rate Cut Hopes Last Month
U.S. 10-Year Treasury Yield Approaches 4.8%
Dollar Index Hits Highest Level in Over Two Years
December CPI to Be Released on the 15th
WTI Jumps 2.9%... Highest in Five Months on Russia Sanctions

The three major indices of the U.S. New York stock market closed mixed on the 13th (local time). Although the market initially fell due to retreating expectations for interest rate cuts following the 'surprise employment' report released late last week, investors engaged in bargain buying mainly in cyclical stocks, leading the Dow Jones Industrial Average (Dow) and the S&P 500 to rebound. U.S. Treasury yields rose close to 4.8% for the 10-year note, and the dollar's value surged to its highest level in two years.

On that day in the New York stock market, the blue-chip-focused Dow closed at 42,297.12, up 358.67 points (0.86%) from the previous trading day. The large-cap-focused S&P 500 rose 9.18 points (0.16%) to 5,836.22, while the tech-heavy Nasdaq fell 73.53 points (0.28%) to close at 19,088.1.

By individual stocks, U.S. heavy equipment maker Caterpillar jumped 3.28%. JPMorgan and UnitedHealth rose 1.78% and 3.95%, respectively. Technology stocks showed weakness. AI software company Palantir dropped 3.39%. Semiconductor stocks also weakened following news that the Biden administration, about a week before its end, will restrict exports of U.S.-made AI semiconductors to China, Russia, and other countries except for about 20 allied nations. Nvidia fell 1.97%, and Micron plunged 4.31%.

Strong U.S. employment data from December last year pushed up U.S. Treasury yields, weighing on the market early in the session. 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 the market forecast of 164,000 and the previous month's figure of 212,000. The unemployment rate dropped from 4.2% in November to 4.1%.

Robust employment led to growing expectations that the Federal Reserve's additional rate cuts this year will be delayed, and U.S. Treasury yields continued to rise for the 10-year note. The yield on the benchmark 10-year U.S. Treasury bond rose 1 basis point (1bp = 0.01 percentage point) from the previous trading day to 4.78%, the highest since November 2023. The yield on the 2-year Treasury, which is sensitive to monetary policy, moved slightly lower to 4.39% from the previous day.

The U.S. dollar also surged to its highest level in two years and two months. The dollar index, which measures the dollar's value against six major currencies, rose 0.24% from the previous day to 109.75, the highest since November 2022.

Investors engaged in rebound buying mainly in cyclical stocks, reducing losses and enabling the Dow and S&P 500 to recover. However, the Nasdaq failed to reverse its decline as selling pressure on tech stocks continued due to retreating expectations for rate cuts. Currently, the probability of the Fed holding rates steady this year reflected in the federal funds futures market is 30.1%, while the probability of a 0.25 percentage point cut is 40.2%. The expectation that the Fed will hold rates steady has surged from 16% a week ago.

Adam Turnquist, Chief Technical Strategist at LPL Financial, said, "With the 10-year U.S. Treasury yield potentially approaching 5%, it has become very difficult for the stock market to gain meaningful momentum until rates stabilize. I don't think the market is at high risk of entering a bear market, but it could certainly experience a correction in the short term."

Earlier that morning, a survey showed that consumer inflation expectations rose amid concerns about 'Trumflation' (inflation caused by Trump's policies). According to the December consumer expectations survey released by the New York Federal Reserve, the median expected inflation over the next three years rose to 3% from 2.6% the previous month. The median expected inflation one year ahead remained at 3%, unchanged from the previous month. The median long-term inflation expectation five years ahead fell from 2.9% to 2.7% during the same period.

Catherine Nixon, Chief Investment Officer (CIO) at Northern Trust, diagnosed, "With current inflation and inflation expectations rising and becoming sticky, bond yields are rising sharply. Equity investors' caution is starting to increase."

This week, investors are focusing on inflation indicators that will influence the Fed's future rate path. 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, exceeding the previous month's 2.7%.

Corporate Q4 earnings announcements will also begin this week. Citigroup, Goldman Sachs, and JPMorgan will report earnings on the 15th, while Morgan Stanley and Bank of America are scheduled to announce on the 16th.

International oil prices rose nearly 2% on news that the U.S. is expanding sanctions on Russian crude oil. West Texas Intermediate (WTI) crude closed at $78.82 per barrel, up $2.25 (2.9%) from the previous day, and Brent crude, the global oil price benchmark, rose $1.25 (1.6%) to $81.01 per barrel. This is the highest level in five months since August last year.