S&P 500 Futures, yields portray market’s anxiety with eyes on ECB, Fed’s Powell

  • Market sentiment dwindles ahead of the week’s top-tier events.
  • S&P 500 Futures struggle to extend the bounce off seven-week low, yields dribble after reversing from 2.5-month high.
  • Cautious mood joins central bank, economic concerns to weigh on sentiment, recently firmer data tames pessimism.

The risk profile remains unclear during early Thursday as traders await the key events scheduled for release during the week. Also challenging the traders are mixed concerns over the central bank moves and the latest economics.

That said, US 10-year Treasury yields reverse the previous day’s losses by taking rounds to 3.27%, after taking a U-turn from the highest levels since mid-June. On the other hand, S&P 500 Futures fade bounced off the lowest levels since July 19 as it seesaws around 3,980 by the press time.

Hawkish bets on the US Federal Reserve’s (Fed) and the European Central Bank’s (ECB) next moves join the fears emanating from the energy crisis and China’s covid conditions, not to forget the Sino-American tussles, to weigh on the market’s mood. On the contrary, recently firmer data from Europe, the US and Japan appeared to have triggered cautious optimism. On the same line could be the Fed’s Beige Book which signaled a recovery in the supply chain and slowing price growth.

Recently, Japan’s second-quarter (Q2) Gross Domestic Product (GDP) came in as 0.9% QoQ versus 0.7% expected and 0.5% prior. Further, the Annualized GDP also rose to 3.5% versus 2.9% market forecasts and 2.2% in previous readings.

Before that, the Eurozone’s final reading of the Gross Domestic Product (GDP) rose by 0.8% QoQ in the three months to June of 2022 (Q2 2022) vs. 0.6% initial forecasts. Also, the YoY figures improved to 4.1% in Q2 vs. 3.9% marked in the initial forecasts. On the other hand, US Goods and Services Trade Balance improved to $-70.7B in July from $-80.9B prior, versus $-70.3B forecasts. Further, the Good Trade Balance deteriorated to $-91.1B from $-89.1B marked in July.

It should be noted that Fed Vice Chair Lael Brainard reiterated on Wednesday that the Fed’s policy rate will need to rise further and that they will need to keep the policy restrictive ‘for some time,’ as reported by Reuters. On the other hand, Cleveland Federal Reserve Bank President Loretta Mester said, “I will decide my preferred size of rate hike at the September meeting itself.” On the other hand, EU President von Der Leyen sounds pessimistic as she said the previous day that 50% of the EU’s aluminum and zinc capacity has already been forced offline due to the power crisis.

Talking about the market’s bets on the Fed and the ECB’s next moves, the CME’s FedWatch Tool signals a 77% chance of the Fed’s 75 basis points (bps) rate hike in September, versus 73% marked the previous day. Further, Reuters said that the market pricing in ECB 75 bp hikes for its key policy interest rates.

Given the indecision in the market, the US dollar regains upside momentum and hence commodities and Antipodeans witness pressure weakness.

Moving on, the art of Fed Chair Powell’s defense of the aggressive rate hikes will be at test during today’s speech, especially due to the hawkish hopes from the ECB. Ahead of that, the ECB’s ability to please the policy hawks will be important to watch as there still prevails indecision between 50 bps and 75 bps move.

Also read: ECB Preview: Between Putin’s rock and hard inflationary place, the deck is stacked against the euro

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