U.S. stocks slide as strong economic data dampens rate cut expectations

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24th May 2024 – (New York) U.S. stocks closed lower on Thursday as investors reevaluated the possibility of a rate cut in September following stronger-than-anticipated economic data. The Dow Jones Industrial Average experienced its worst day of the year, dropping by 605.78 points, or 1.53 per cent, to 39,065.26. The S&P 500 also declined, sinking 39.17 points, or 0.74 per cent, to 5,267.84. Likewise, the Nasdaq Composite Index shed 65.51 points, or 0.39 per cent, ending the day at 16,736.03.

Of the 11 primary S&P 500 sectors, ten closed in the red, with real estate and utilities leading the decliners by losing 2.16 per cent and 1.70 per cent, respectively. However, technology stocks bucked the trend, rising by 0.56 per cent.

The flash estimate for May revealed an improvement in the U.S. S&P Global Composite PMI, reaching 54.4 compared to April’s 51.3. This suggests that business activity in the U.S. private sector continued to grow at a faster pace. Similarly, the S&P Global Manufacturing PMI increased to 50.9 from 50.0 during the same period, indicating an expansion in the manufacturing sector. Additionally, the S&P Global Services PMI rose to 54.8 from 51.3.

Chris Williamson, chief business economist at S&P Global Market Intelligence, highlighted that the U.S. economic upturn has regained momentum after two months of slower growth. The early PMI data indicates the fastest expansion in over two years for May, positioning the U.S. economy for solid GDP growth in the second quarter.

However, stronger-than-expected labour market data raised concerns among investors that the Federal Reserve may delay interest rate cuts. According to the CME FedWatch Tool, traders are now pricing in a 51 per cent chance of a rate cut during the Fed’s September meeting, down from 58 per cent the previous day and nearly 68 per cent the week before. Generally, a probability below 60 per cent suggests that a rate cut is unlikely.

In other news, April’s new home sales fell short of estimates, with an annualized rate of 634,000 compared to the anticipated 678,000. This decline indicates reduced economic confidence among builders, who are facing challenges in securing financing for new construction projects.

Market sentiment was influenced by bond market movements, with falling bond prices leading to a pessimistic mood. Steve Sosnick, chief strategist at Interactive Brokers, explained that the strengthening economy did not resonate well with bond traders who closely monitor central bank policies. As a result, stocks generally trended lower as bond prices declined.

On a positive note, Nvidia’s shares surged over 9 per cent, surpassing $1,000 for the first time, following the company’s better-than-expected first-quarter earnings. The chip giant also raised its guidance, alleviating concerns about waning demand for artificial intelligence. Conversely, Boeing weighed down the markets, plummeting over 7.5 per cent after the troubled aircraft manufacturer reported worse-than-expected cash flows for the year.