[New York Stock Market Briefing] US Rate Cut Expectations 'Drop'... Major Indices Plunge

All three major indices of the New York Stock Exchange plunged. Investors dumped stocks en masse as the December US non-farm payroll data came in hotter than expected. The significantly higher-than-expected employment figures dampened hopes for a rate cut.

On the 10th (Eastern US time), the Dow Jones Industrial Average closed at 41,938.45, down 696.75 points (1.63%) from the previous session at the New York Stock Exchange (NYSE). The S&P 500 index fell 91.21 points (1.54%) to 5,827.04, and the Nasdaq Composite index dropped 317.25 points (1.63%) to close at 19,161.63.

The US Department of Labor announced that non-farm payrolls increased by 256,000 in December compared to the previous month. This result exceeded the market expectation of 160,000 by nearly 100,000. It was also more than 40,000 higher than the revised figure of 212,000 from the previous month. The unemployment rate fell to 4.1%, below both the market expectation and the previous month's figure of 4.2%.

In terms of employment figures alone, the US economy was robust. The asset market was generally shocked by the employment results. The US 2-year Treasury yield, sensitive to the Federal Reserve's monetary policy, soared by 12 basis points on the day, and the dollar index jumped to the brink of 110 during the session. This is because the employment figures significantly exceeded expectations, weakening the Federal Reserve's justification for lowering rates. With inflation still hot and employment adding to the heat, the Fed may need to maintain high rates to cool the economy.

The stock market was also swept up in this atmosphere. Immediately after the release of the December employment figures, stock index futures plunged nearly 1%, and this atmosphere continued throughout the session despite some sharp fluctuations. The 'Magnificent 7', referring to seven giant tech companies, all fell except for Meta. Apple dropped 2.41%, NVIDIA fell 3.00%, and Microsoft and Amazon also recorded declines of over 1%.

As expectations for a rate cut were dampened, AI and semiconductor-related stocks also tumbled en masse. A high-interest-rate environment is generally considered unfavorable for growth stocks. The Philadelphia Semiconductor Index plunged 2.42% on the day.

Among the 30 stocks that make up the index, only TSMC managed to hold steady, while all other stocks fell. AMD's stock dropped 4.76% as Goldman Sachs downgraded its investment rating due to a competitive environment. Broadcom fell 2.18%. Arm, Applied Materials, and Marvell Technology also recorded declines of over 3%.

The notable 1.6% plunge in the Dow Jones, which is focused on blue-chip stocks, is also noteworthy. Traditional industry-related stocks, blue-chip stocks, and value stocks are considered more resilient in a high-interest-rate environment than growth stocks, but investor sentiment was as bad as for growth stocks. JP Morgan Chase, Visa, and Coca-Cola showed declines of over 1%, while American Express and Goldman Sachs fell by more than 3%. Only Walmart and Chevron recorded gains of over 1%.

With the day's decline, the S&P 500 has almost given back all the gains recorded after Donald Trump was elected President of the United States in the last election. Since election day, the S&P 500's return has been only 0.5%.

Scott Wren, Senior Global Market Strategist at Wells Fargo Investment Institute, said, "(The December employment figures are) good news for the economy but not good news for the market, at least for now," adding, "However, our outlook that the job market may slow down over the next few quarters will not change, even though December employment was higher than expected."

The atmosphere is that a rate freeze this month is a foregone conclusion. The Consumer Sentiment Index, reflecting US consumers' confidence in the economy, fell slightly in January. However, the surge in inflation expectations suggested that price instability is reviving.

According to the University of Michigan, the preliminary Consumer Sentiment Index for January 2025 was 73.2. This is a 1.1% drop from 74.0 in December. On the other hand, the 1-year expected inflation surged to 3.3%. It rose significantly from 2.8% in the previous month, marking the highest level since May 2024. The 5-year long-term expected inflation also rose from 3.0% in the previous month to 3.3%, the highest level in about 17 years since June 2008.

By sector, all sectors except energy tumbled. Finance, real estate, and technology plunged over 2%, while industrials, consumer staples, and communication services also fell over 1%.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) rose 1.47 points (8.14%) from the previous session to 19.54.

Hye-won Ahn, Hankyung.com Reporter anhw@hankyung.com