Inflation returning? Economic data triggers market turbulence, NASDAQ and S&P 500 indices plummet

Despite the monthly employment report and the Consumer Price Index (CPI) often dominating economic news headlines, investors felt once again on Tuesday the importance of the JOLTS report (Job Openings and Labor Turnover Survey) and the ISM Services Index, which cannot be ignored.

According to the Zhitong Finance APP, Interactive Brokers senior economist Jose Torres noted in a report: "The market performed steadily in the morning until the release of two economic data points, which led to a surge in yields and a sharp decline in the stock market." U.S. Treasury prices plummeted, pushing yields higher, as yields typically have an inverse relationship with bond prices. The yield on the 10-year U.S. Treasury rose by 6.8 basis points to 4.684%, marking the highest level since April 25.

The stock market subsequently fell, with the technology sector hit hardest. The NASDAQ Composite Index dropped nearly 1.9%, the S&P 500 Index fell nearly 1.1%, and the Dow Jones Industrial Average declined by about 178 points. AI chip manufacturer NVIDIA (NVDA.US) saw its stock price open at a record high before turning negative, closing down 6.2%, although it still accumulated over a 4% increase in the first four trading days of the new year.

One of the main reasons for the market's violent reaction was the price paid index in the ISM Services Index. The index recorded 64.4% in December, significantly higher than November's 58.2%, reaching the highest level since the beginning of 2023. This indicates a significant increase in cost pressures within the service industry.

Meanwhile, the November JOLTS report showed that the number of job openings in the U.S. rose from 7.8 million in October to 8.1 million, reaching a six-month high. In response, Louis Navellier, founder of Navellier & Associates, stated: "Today, the ISM non-manufacturing price index unexpectedly rose sharply, exceeding expectations, while the JOLTS report data also significantly surpassed market forecasts, further pushing up interest rates."

These data points triggered concerns in the market about "persistent inflation" and weakened investor expectations for interest rate cuts in 2025. According to the CME FedWatch tool, the market now estimates a roughly 95% probability that the Federal Reserve will keep interest rates unchanged this month, up from 91.4% on Monday and 62.9% a month ago. Additionally, traders expect the probability of no rate cuts before June next year to rise from 10% a month ago to 33%.

Navellier pointed out, "Today's economic data once again puts the market in a 'good news is bad news' dilemma. Strong employment data is beneficial for GDP and consumer spending, but it may also make the Federal Reserve more cautious. Meanwhile, the rise in service prices suggests that inflationary stickiness remains, but moderate inflation is actually beneficial for companies' pricing power and profit margins."

Despite the potential benefits of medium-term inflation for corporate earnings, current investors are showing cautious sentiment towards the combination of high valuations in technology stocks and rising Treasury yields"The economic data on Tuesday indicated that the U.S. economy is accelerating its recovery after the November elections, but businesses and consumers remain cautious in the face of uncertainty," Torres said. "However, this hesitation has been overcome, and Wall Street's focus has shifted to the fiscal deficit, Trump tariffs, and inflationary pressures, which could further drive up interest rates and weigh on asset prices."