[New York Stock Market] Sharp Drop Due to 'Hawkish' Powell... Dow Down 1.72%

Major indices on the U.S. New York Stock Exchange closed lower on the 7th (local time) as Federal Reserve (Fed) Chair Jerome Powell, appearing before Congress, reinforced tightening by stating that "the terminal interest rate could be higher than previously expected." The yield on the 2-year U.S. Treasury note, sensitive to monetary policy, surpassed 5% for the first time since 2007, and the inversion spread with the 10-year Treasury yield widened to the largest margin since 1981. The dollar showed strength.

At the New York Stock Exchange (NYSE) that day, the Dow Jones Industrial Average closed at 32,856.46, down 574.98 points (1.72%) from the previous session. The large-cap S&P 500 index fell 62.05 points (1.53%) to 3,986.37, and the tech-heavy Nasdaq index dropped 145.40 points (1.25%) to 11,530.33.

All 11 sectors within the S&P 500 recorded declines. Financials, technology, communications, and materials stocks, which are sensitive to interest rates, saw notable drops. Energy stocks also underperformed due to the strong dollar. Tesla closed down 3.15% from the previous session. Microsoft fell 1.06%, and Apple declined 1.46%. Financial stocks such as JPMorgan (-2.94%), Bank of America (-3.20%), Citi (-2.11%), and Wells Fargo (-4.68%) all dropped sharply. Additionally, WW International surged nearly 80% following reports of its acquisition of the subscription-based telemedicine platform Sequence. Rivian fell more than 14% due to plans to issue $1.3 billion in bonds.

[Image source=Reuters Yonhap News]

Investors closely watched Powell’s Senate testimony, Treasury yields, and the dollar that day. Powell’s unexpectedly hawkish tone during his appearance before the Senate Banking Committee exerted strong downward pressure on the stock market. He stated, "Recent economic indicators have all come in stronger than expected," adding, "This suggests that the terminal rate level could be higher than previously anticipated." He also emphasized, "If the overall data require faster tightening, we are prepared to increase the pace of rate hikes."

These remarks are interpreted as leaving the door open for a big rate hike at the Federal Open Market Committee (FOMC) meeting scheduled for March 21-22. Since March last year, the Fed has raised U.S. interest rates to the highest level since 2007, at 4.5-4.75%. Following Powell’s comments, it is widely expected that the Fed’s dot plot indicating the path of rate hikes at the March FOMC will be revised upward. Previously, the median terminal rate on the dot plot released by the Fed in December last year was 5.1% by the end of this year.

According to the CME FedWatch tool, the federal funds (FF) futures market currently prices in nearly a 70% chance of a big rate hike in March, a sharp increase from the previous day’s 31% and up from just 9% a month ago. Additionally, futures markets are pricing in the highest probability that the terminal rate this summer will rise to 5.5-5.75%. Considering the current U.S. rate of 4.5-4.75%, this implies a potential additional 1 percentage point increase.

Investment bank Morgan Stanley noted in an investor note that "Powell’s remarks opened the possibility of a 0.5 percentage point hike in March," and that the pace of tightening could accelerate depending on the employment report to be released on the 10th. Michael Brown, strategist at TraderX, also described Powell’s tone as "surprisingly hawkish," forecasting that the terminal rate could reach 6% depending on employment data.

The 2-year U.S. Treasury yield, sensitive to monetary policy, surpassed 5% for the first time since 2007. In the New York bond market that afternoon, the 2-year yield rose to 5.021% before easing slightly to around 5.01%. The 10-year yield briefly exceeded 4% early in the session following Powell’s hawkish remarks but has since moderated to about 3.96%. The inversion between the 10-year and 2-year yields widened to more than 1 percentage point, the largest since 1981. The yield curve inversion, where the long-term 10-year yield falls below the short-term 2-year yield, is generally considered a precursor to a recession.

The dollar index, which measures the value of the dollar against the currencies of six major countries, surpassed 105.6, reaching its highest level in about two months. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street’s "fear gauge," rose more than 5% and is trading around 19.5.

The market is also showing caution as it awaits the employment report later in the week. Since Powell emphasized data in determining the size of rate hikes, the February employment report and the January Job Openings and Labor Turnover Survey (JOLT) to be released this week are expected to play a more critical role. Following the January employment report, which exceeded expectations by nearly three times and heightened tightening concerns, it is crucial to see if the February report will show a similar trend. Nonfarm payrolls for February are estimated to increase by 225,000, a decrease from the previous month. The unemployment rate is expected to remain steady at 3.4%.

Powell is scheduled to appear before the House of Representatives the following day. On the 8th, the Fed’s Beige Book, which contains economic assessments, will be released. Next week, the February Consumer Price Index (CPI) and retail sales data are also awaited. Kali Cox of eToro expressed concern, saying, "The Fed’s top priority is to reduce inflation," adding, "People are beginning to consider that high inflation may persist. This could be the worst-case scenario for long-term investors."

Oil prices fell as the dollar surged following Powell’s hawkish remarks. On the New York Mercantile Exchange, April delivery West Texas Intermediate (WTI) crude closed at $77.58 per barrel, down $2.88 (3.58%) from the previous session.

This content was produced with the assistance of AI translation services.