The futures market fell early in the evening following a day of stock market declines on Tuesday. Yesterday’s selloff was prompted by comments from Federal Reserve Governor Lael Brainard, who stated that the central bank will “continue tightening monetary policy through a series of interest-rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.” This suggested to traders that a decline in the Federal Reserve’s balance sheet could come more quickly than prior projections, and the markets fell throughout the day in response. The major indices ended not too far from their intra-day lows, with the S&P 500 down 58 points, the Dow Jones Industrial Average off 281 points, and the NASDAQ having tumbled 328 points. The futures market continued lower throughout the night and was well into the red by early morning, suggesting a weak start to the trading day. All eyes will be on the release of The FOMC minutes later today, which will give traders further insight into how the Fed views its balance sheet and how quickly future interest-rate hikes and reductions of the loan portfolio will come.
Meantime, market breadth was quite negative yesterday, as decliners outpaced advancers by a 4.2-to-1.0 ratio. Consumer discretionary stocks ranked among the weakest performers as traders rushed into safe-haven utility equities, which had the strongest price movements during the bearish session.
In commodity news, oil prices fell yesterday alongside the broader market, as traders think tightening credit will harm demand. Meanwhile, U.S. Treasury bond yields rose across the board, as investors worried about how aggressively the central bank may sell bonds in the coming months. This also caused a steepening yield curve, with long-term rates rising more than short-term ones. This is usually positive for the earnings of financial companies that borrow short and lend long. That said, a portion of the yield curve remains inverted, which is usually a signal of a recession down the road. The CBOE Volatility Index (or VIX), which measures the magnitude of price movements in the S&P 500, rose considerably, as demand for options protection spiked.
There will be few economic indicators in the days ahead that could potentially drive changes in sentiment. Several regional Fed Governors will be giving remarks on the economy and employment, and we will also get the latest weekly initial jobless claims data tomorrow morning. Finally, on Friday, wholesale inventories are slated for release. A few earnings reports are also on the docket for the remainder of this week, before the pace begins to pick up next week with the commencement of the first-quarter reporting season. Absent other sources of data, it seems most likely that commentary from the Federal Reserve leaders will continue to drive trading, much like we saw yesterday.
– John E. Seibert III
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
