[New York Stock Exchange] Dow and S&P Close Lower on Fed's Hawkish Rate Cut... Nvidia Surpasses $5 Trillion Market Cap

Fed Cuts Rates by Additional 0.25 Percentage Points
Powell: "December Rate Cut Not a Given"
Hawkish Remarks Erase Stock Market Gains as Treasury Yields Surge
Nvidia Rises 3% on AI Optimism, Hits $5 Trillion Market Cap
Focus on U.S.-Chi

The three major U.S. stock indexes closed mixed on the 29th (local time) in New York. After Jerome Powell, Chairman of the U.S. Federal Reserve, hinted that there may not be any further interest rate cuts within the year, the main indexes, which had set new intraday record highs, gave up their gains. As expectations for rate cuts diminished, U.S. Treasury yields surged, with the 10-year yield surpassing 4%.

However, Nvidia hit an all-time high for the second consecutive day on optimism surrounding artificial intelligence (AI), becoming the first company in the world to surpass a market capitalization of $5 trillion.

On the 29th (local time) at the New York Stock Exchange (NYSE) trading floor in the United States, a trader is seen working while, on the screen behind, Jerome Powell, Chairman of the U.S. Federal Reserve, is shown holding a press conference following the announcement of an interest rate cut. Photo by Reuters Yonhap News

On this day at the New York Stock Exchange, the blue-chip Dow Jones Industrial Average closed at 47,632.2, down 74.37 points (0.16%) from the previous session. The S&P 500 index, focused on large-cap stocks, finished at 6,890.59, down 0.3 points (less than 0.1%). Only the tech-heavy Nasdaq index rose, climbing 130.98 points (0.55%) to close at 23,958.473, setting another record high.

All three indexes rose together at the start of trading, each breaking record highs. However, after the Fed's interest rate decision in the afternoon, Chairman Powell's hawkish (favoring monetary tightening) remarks caused the gains to be erased. The Dow Jones Industrial Average and the S&P 500 ultimately turned negative.

As expected, the Fed cut the federal funds rate by 0.25 percentage points to a range of 3.75-4.0% per year, marking its second consecutive rate cut. It also decided to end quantitative tightening (QT), which began in June 2022, in December. Market sentiment weakened immediately after Powell's press conference held right after these decisions.

He said, "We should not take a December rate cut for granted. In fact, we are far from that (a December cut)," drawing a clear line against expectations of another cut in December. He added, "There are strong differences of opinion among policymakers about which direction to take in December," and "There is a growing chorus saying we should wait at least one cycle (meeting)."

The market's reaction was immediate. Right after Powell's remarks, expectations for another rate cut within the year quickly weakened in the interest rate futures market. According to CME FedWatch, the probability of the Fed cutting rates by another 0.25 percentage points in December, lowering the rate to 3.5-3.75% per year, dropped from 90% the previous day to the 60% range after Powell's comments.

With expectations for monetary easing disappearing, U.S. Treasury yields are surging. The 10-year Treasury yield, the global benchmark for bond yields, jumped 9 basis points (1bp = 0.01 percentage point) from the previous day to 4.08%, while the 2-year Treasury yield, which is sensitive to monetary policy, soared 10 basis points to around 3.6%.

Michael Rosen, Chief Investment Officer (CIO) at Angeles Investment, said, "Chairman Powell's remarks reflect the tension within the Fed between those who favor more aggressive easing and those still concerned about high inflation," adding, "The market seems to be pricing in the speed and scale of future rate cuts too aggressively in stock prices. Inflation remains above the Fed's target, monetary policy is proceeding in a somewhat accommodative direction, and nominal interest rates are likely to remain below nominal GDP growth."

Despite the Fed's hawkish rate cut, AI-related stocks, including Nvidia, remained strong and drove the Nasdaq higher. Jensen Huang, CEO of Nvidia, dismissed the notion of an AI bubble at a developer event (GTC) held in Washington, D.C. the previous day, stating that AI chip orders are expected to generate $500 billion in revenue over the next several quarters. He also announced a $1 billion investment in Finnish telecom equipment company Nokia and established a strategic partnership for developing next-generation 6G mobile communication technology.

Investors are betting that AI innovation and profitability will be sustained over the long term. As a result, Nvidia's share price rose 3.05% on the day, following a 4.98% increase the previous day, becoming the first company in the world to reach a $5 trillion market capitalization. As of the closing price, Nvidia shares stood at $207.04 per share, with a market cap of $5.031 trillion. Buoyed by Nvidia, other semiconductor stocks were also strong, with AMD rising 2.45% and Micron up 2.13%.

Keith Buchanan, Senior Portfolio Manager at Globalt Investments, said, "We have entered the next phase of the AI story," adding, "We are now watching the acceleration of growth these companies anticipate, rather than just performance-based results."

The market believes that the earnings reports of big tech companies will determine confidence in future AI profitability and whether the stock market rally will continue. After the market closed, Microsoft, Google parent company Alphabet, and Facebook parent company Meta Platforms all reported results that exceeded expert expectations. On the 30th, Apple and Amazon are set to announce their earnings.

The upcoming U.S.-China summit, just one day away, is also a key variable for the stock market's direction. The two countries have reached a tentative agreement on suspending China's rare earth export controls and withdrawing the U.S.'s additional 100% tariffs on Chinese goods, and have reportedly found compromises in other areas such as fentanyl and soybeans. As a result, the market views the two countries as having effectively reached a "trade truce."