The futures market started on a weak note last night, giving back a portion of the strong gains from the regular trading session. Traders shook off comments made by Federal Reserve Chairman Jerome Powell on Monday at the National Association for Business Economics conference, where he stated that the central bank may need to move more quickly raising interest rates than a 25-basis-points-per-meeting pace to reduce inflation. This hurt investor sentiment on Monday, but stocks rallied in the early portion of the trading session on Tuesday. They then trended sideways through much of the afternoon before taking another leg up and ending the session close to their daily highs. All told, the Dow Jones Industrial Average rose 254 points, the NASDAQ jumped 270 points, and the S&P 500 added 50 points.
Futures recovered through the night and were well within the green by midnight. However, sentiment shifted lower through the early morning hours until it was decidedly in the red. This morning, Fed Chairman Powell will be giving remarks on digital challenges, and other Fed regional governors will give speeches on monetary policy. These events may provide some insight into how the Fed is thinking. A majority of traders are pricing in a 50-basis-point hike at the Fed meeting in May, as the central bank leaders have struck a more-hawkish tone since last week’s monetary policy decision. Overall, we think the negative futures market will lead to a weak start to the trading day.
Meantime, market breadth was positive yesterday, with advancers outpacing decliners by a 1.6-to-1.0 ratio. Consumer discretionary stocks were among the best performers on the day, while energy issues were among the weakest, hurt by a decline in the price of the related commodities. Oil prices fell yesterday as news broke that progress had been made in cease fire talks between Russia and Ukraine, reducing worries about a supply-demand imbalance. Moreover, U.S. Treasury bond yields climbed across the board, as traders think the Fed will hike rates faster than prior expectations. Long-term yields rose more than short-term ones, but the three-, five- and seven-year yields remain higher than the ten-year yield. This inversion usually suggests that a recession is a possibility. The CBOE Volatility Index (VIX), which measures the magnitude of price movements in the S&P 500, fell yesterday as demand for options protection declined slightly.
Looking ahead, a few economic reports will be released in the coming days, including initial and continuing jobless claims and durable goods orders tomorrow, and as noted above, several regional Fed leaders will give remarks about housing and the economy. On Friday, data from the University of Michigan on consumer sentiment will be released. In general, we think all eyes will be on the Fed commentary, rising bond yields, and the ongoing war in Eastern Europe.
– John E. Seibert III
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
