Wall Street is re-thinking its Fed fight, and pricing in two more rate hikes following Friday’s blowout jobs report.
U.S. equity futures extended declines Monday, while the dollar powered higher against its global peers and Treasury yields added to recent upward moves, as investors continued to re-set Fed rate expectations following Friday’s blowout jobs report.
Treasury bond yields surged Friday, and extended those moves in early New York trading, following the Labor Department’s estimate that 517,000 new jobs were created last month, a tally that blasted Street forecasts and forced traders to heed multiple warnings from the Fed — including just days earlier from Chairman Jerome Powell — that rates will need to rise further in order to tame the underlying inflation pressures that remain embedded in the world’s biggest economy.
Data showing a big rebound in services sector activity for the month of January, as well, added to the rate hike concern, although the so-called ‘prices paid’ component of the PMI figures continues to decline.
Still, even with the rising chorus of analysts indicating the Fed is closer to engineering the ‘soft landing‘ it’s hoping for, where inflation cools while the economy grows, rate hike bets are back on the rise, pressure equity valuations and opening bell futures.
“The Fed has done little over the past six months to talk against the easing financial conditions and with one rate hike left the question is now whether it must do more – instead of cutting rates as the market believes,” Saxo Bank strategists wrote Monday.
The CME Group’s FedWatch suggests both a 99.6% chance of another 25 basis point rate hike from the Fed next month in Washington, with bets on a follow-on move in early May — that would take the Fed Funds rate to a range of between 5% and 5.25% — rising to around 69.5% in early Monday trading.
Benchmark 10-year Treasury note yields were marked 7 basis points higher from their Friday close at 3.601% in early New York trading while 2-year notes added 9 basis points to change hands at 4.395%. The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 0.27% higher at 103.193, the highest since early January.
Markets will navigate a fairly tepid week in terms of earnings and data releases, but will nonetheless face what could be an important appearance from Federal Reserve Chairman Jerome Powell shortly on the heels of Friday’s blowout payroll report.
Powell, who will participate in a question-and-answer session at the Economic Club of Washington, D.C. at 12:40 pm eastern time Tuesday, has consistently suggested that the Fed is set for at least two more rate hikes before it considers a pause to determine their impact on inflation and employment in the world’s biggest economy.
Outside of Powell’s Tuesday appearance, investors are expecting around 93 S&P 500 companies to report December quarter earnings this week, including CVS Health (CVS) – Get Free Report, Walt Disney (DIS) – Get Free Report, PepsiCo (PEP) – Get Free Report and PayPal (PYPL) – Get Free Report.
With around half of the S&P 500 reporting thus far, collective fourth quarter earnings are expected to fall 2.7% from last year to a share-weighted $447.1 billion, according to data from Refinitiv. The forecast for first quarter earnings is a decline of around 2.5%.
Approaching the start of trading on Wall Street, futures tied to the S&P 500, which is up 7.7% for the year, are priced for a 27 point opening bell decline while those linked to the Dow Jones Industrial Average are set for a 170 point pullback. The tech-focused Nasdaq, which is up 15.6% for the year, was marked 105 points lower.
Tesla (TSLA) – Get Free Report shares were the most active pre-market stock, rising 1.5% following another series of price adjustments for its Model Y that came shortly after the U.S. government lifted the threshold for crossover vehicles to eligible for climate-linked tax credits.
Tyson Foods (TSN) – Get Free Report, meanwhile, slumped 4.8% after the world’s biggest food producer posted weaker-than-expected first quarter earnings amid a pullback in beef prices that offset gains in chicken sales.
In overseas markets, Europe’s Stoxx 600 was marked 0.85% lower in early Frankfurt trading and largely tracking U.S. futures, while Asia’s region-wide MSCI ex-Japan index slumped 2.1%.
Japan’s Nikkei 225 gained 0.67% as the yen fell to a three-week low against the surging dollar, heled by reports that the Bank of Japan will appoint deputy Masayoshi Amamiya to the top role, a move seen as extending the bank’s dovish policies.