[New York Stock Market] Fed Lowers on "Year-End Recession Possibility"... Nasdaq Down 0.85%

by Cho Seulkina

Published 13 Apr.2023 05:33(KST)

The three major indices of the U.S. New York stock market closed lower on the 12th (local time) as concerns over an economic recession weighed on the market. The consumer price index (CPI) falling short of expectations acted as a negative factor highlighting the possibility of a recession, and investor sentiment froze further after the minutes of the March Federal Open Market Committee (FOMC) regular meeting were released in the afternoon, mentioning the possibility of a recession in the second half of the year.

On this day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 33,646.50, down 38.29 points (0.11%) from the previous session. The S&P 500, which focuses on large-cap stocks, ended at 4,091.95, down 16.99 points (0.41%), and the tech-heavy Nasdaq closed at 11,929.34, down 102.54 points (0.85%).

Among the 11 sectors of the S&P 500, seven sectors including consumer discretionary, consumer staples, technology, communication, and real estate declined. In particular, the drop in consumer discretionary was notably more than 1%. Representative tech stocks such as Tesla (-3.35%), Amazon (-2.09%), Netflix (-2.12%), and Nvidia (-2.48%) all fell together. Airline stocks including American Airlines also showed weakness. Meanwhile, Shopify rose 1.16% from the previous session after JP Morgan upgraded its investment rating. Triton International surged more than 32% on news of being acquired by Brookfield Infrastructure.

[Image source=Reuters Yonhap News]

Investors focused on the economic outlook and the Federal Reserve's policy path based on the released March CPI and March FOMC meeting minutes. According to the U.S. Department of Labor, the March CPI rose 5% year-over-year. This is a significant slowdown from the previous month's 6% increase and slightly below the market forecast of 5.1% compiled by Dow Jones. The March CPI rose 0.1% month-over-month, also slightly below the forecast of 0.2%.

This is the first time since September 2021 (5.4%) that the U.S. monthly CPI has recorded a 5% level. It is also the lowest level since May 2021 (5.0%). Accordingly, there is a diagnosis that the Fed's rate hike cycle is nearing its end. The Fed, which declared war on inflation, began raising rates in March last year and has currently raised the U.S. benchmark interest rate to 4.75-5.0%. Jeffrey Roach, chief economist at LPL Financial, said, "Investors have gained more confidence that the next FOMC meeting will be the last rate hike." The producer price index (PPI), a wholesale price indicator, will be released on the 13th.

Currently, the market consensus is that the Fed may freeze rates after an additional baby step (0.25 percentage point rate hike) at the May FOMC meeting. Sam Stovall of CFRA said, "It is encouraging that the Fed is showing the direction it wants," but added, "It is not enough to make the Fed stop raising rates." Paul Ashworth, economist at Capital Economics, predicted, "The Fed will make its last 0.25 percentage point rate hike in May."

However, sticky core inflation remains a concern. Thomas Barkin, president of the Richmond Federal Reserve Bank, said in an interview that "we should be cautious about declaring victory over inflation too soon" and pointed out that "core inflation is still too high." Core CPI, excluding energy and food, rose 5.6% year-over-year and 0.4% month-over-month. Larry Fink, CEO of BlackRock, warned about sticky inflation, saying, "Inflation is unlikely to fall below 4% anytime soon."

As the earnings season begins, recession concerns have spread again. The easing of the CPI growth rate, which initially led to a relief rally early in the session, was instead perceived as a negative factor fueling recession fears. Additionally, the FOMC minutes mentioning the possibility of a recession by Fed officials further chilled investor sentiment. According to the March FOMC minutes released that afternoon, participants noted, "Considering the potential economic impact of the banking sector, a mild recession may appear from the end of this year," and "recovery is expected over about two years." The rate decision at that time was made amid turmoil following the collapse of Silicon Valley Bank (SVB) and rising concerns about a banking crisis.

Ed Hyman, chairman of Evercore ISI, argued that the U.S. economy has already entered a recession and that the Fed should stop the rate hike cycle. He emphasized, "At least, there should be no further hikes at the next meeting," and "The Fed should pause and see what happens." Warren Buffett, chairman of Berkshire Hathaway and known as the "Oracle of Investing," also appeared on CNBC's Squawk Box that day, warning that "the bank failures are not over." Brian Levitt, global market strategist at Invesco, pointed out, "As banks tighten lending standards, the likelihood of a recession is high."

Later in the week, earnings reports from major banks such as JPMorgan Chase, Citi, and Wells Fargo are also scheduled. Economic media CNBC emphasized the significance, saying, "As the earnings season kicks off, the U.S. economy and consumer health will be put to the test." Attention will also focus on any management messages regarding loan regulations and credit tightening following the SVB incident.

In the New York bond market on this day, U.S. Treasury yields fell after the CPI release. The 10-year U.S. Treasury yield is hovering around 3.4%, and the 2-year yield, sensitive to monetary policy, is around 3.97%. The decline in Treasury yields means a rise in bond prices, which are considered safe assets.

The price of gold, a representative safe asset, rose. On the New York Mercantile Exchange, June gold futures prices rose to as high as $2,043.90 per ounce during the session, marking the highest level in about a week. Gold demand is expanding amid recession concerns, and the weaker dollar also supported gold prices that day. The dollar index, which shows the value of the dollar against the currencies of six major countries, was trading at around 101.5, down more than 0.6% from the previous session.

Oil prices rose. On the New York Mercantile Exchange, West Texas Intermediate (WTI) crude oil for May delivery closed at $83.26 per barrel, up $1.73 (2.12%) from the previous day.