U.S. stock futures fell on Friday ahead of a much-anticipated speech by Federal Reserve Chairman Jay Powell that investors expect to provide guidance on the central bank’s strategy to fight inflation in increasing interest rates.
Futures fell slightly with European stocks in the hours leading up to Powell’s speech at the Jackson Hole annual central banks summit.
The Fed is trying to fight off the strongest period of rising consumer prices in about four decades, with inflation hitting 8.5% in July. But policymakers are also trying to avoid tipping the world’s largest economy into a deep recession with their program of aggressive rate hikes.
Bank of America analysts said the Fed was “likely to underscore its commitment to price stability, even at the risk of recession” in Jackson Hole. “Powell is likely to say the pace of increases may slow while emphasizing tight policy and no quick pivot to cuts,” they added.
Futures tracking Wall Street’s S&P 500 gauge and the tech-heavy Nasdaq 100 lost 0.4% and 0.5% respectively, while the regional Europe Stoxx 600 equity index fell 0. .4% early morning in London.
As market participants awaited Powell’s speech at 3:00 p.m. London time (10:00 a.m. New York time), U.S. government debt was under pressure, as traders awaited signals on the future pace and direction of US monetary policy.
In government bond markets, the yield on the 10-year U.S. Treasury bill — seen as an indicator of borrowing costs around the world — added 0.05 percentage points to 3.08% on Friday, the price of the reference debt instrument having fallen.
The dollar fell 0.2% against a basket of six other currencies, after rising in recent days on expectations of higher US interest rates. The euro gained 0.4% against the greenback to trade slightly above parity.
Market prices on Friday indicated that investors now expect the Fed to raise its main interest rate to 3.7% by February 2023, from projections of 3.3% at the start of the month. ‘august. The central bank’s current target range is between 2.25 and 2.50 percent, after two consecutive increases of 0.75 percentage points.
Traders are factoring in the possibility of another 0.75 percentage point rise after the Fed’s monetary policy meeting in September, with Powell’s language on Friday around inflation and the health of the economy likely to move those projections back and forth – especially against the backdrop of a thin summer. trading volumes.
Already, expectations of tighter policy and higher borrowing costs have started to weigh on investor sentiment in corporate debt markets.
The yield spread between high-yield U.S. corporate bonds and ultra-low-risk government debt has widened in recent weeks, from 4.2 percentage points on August 11 to 4.6 percentage points on markets close Thursday, according to Ice Data. Services index. Junk bond funds saw $4.8 billion in outflows in the week ending Wednesday, marking the biggest redemption in nine weeks, according to EPFR data compiled by BofA.
BofA expects the Fed to raise borrowing costs by 0.5 percentage points in September.
Still, some have suggested that Powell may not shed new light on Fed strategy during his speech. “We won’t learn much more than what we already know,” said Jim Paulsen, chief investment strategist at Leuthold Group. “The Fed is going to raise rates again in September, they’re getting a little more dovish from what they’ve been, but that’s not surprising given their hawkish attitude.”
He added: “Having said that, it is undeniable that [the speeches] move markets. For day traders, this is extremely important.
Deutsche Bank economists did not expect Powell to provide “explicit guidance” for the upcoming Fed meeting, but they expected the central bank chairman to “steer his remarks in a direction hawkish to ensure that the Fed’s inflation-fighting credentials are not challenged.”
New figures due out later on Friday could also offer further clues to the health of the US consumer, with personal income and spending data due at 1.30pm London time.