U.S. equity futures slipped lower Wednesday, while Treasury bond yields pushed higher and the dollar extended gains against its global peers, as investors worry that improving consumer sentiment, retail spending and jobs growth will continue to stoke domestic inflation and trigger more Fed rate hikes.
Stocks ended higher again yesterday after better-than-expected second quarter earnings from Walmart (WMT) and Home Depot (HD) , alongside what appears to be a solid rebound in GDP growth prospects, lifted the Dow past the 34,000 point mark for the first time since May.
The gains, which followed a blowout July jobs number that included 528,000 new hires alongside wage growth of 5.2%, also added to concerns that inflation readings may accelerate again over the months ahead.
An overnight rate hike by the Bank of New Zealand, its fourth in succession, as well as a searing reading of 10.1% for July inflation in Britain, the highest in forty years, cemented those concerns, lifting the odds of another jumbo Fed rate hike in September to around 48.5% overnight, according to the CME Group’s FedWatch.
Benchmark 2-year Treasury note yields, the most-sensitive to interest rate changes, were marked 5 basis points higher at 3.308% in overnight dealing, while 10-year notes traded at 2.868%.
Minutes of the Federal Reserve’s July policy meeting are likely to hint towards smaller rate hikes over the back half of the year, with Chairman Jerome Powell and his colleagues content to focus on a wealth of data prior to their next decision in September.
The July minutes, published at 2:00 pm Eastern time, will detail the thinking behind the Fed’s second consecutive 75 basis point rate hike, which took the benchmark Fed Funds rate to a range of between 2.25% to 2.5%. Powell said at the time that the Fed ‘wouldn’t hesitate’ to execute another large rate hike if the Open Markets Committee were to deem it appropriate.
The U.S. Treasury curve remains steeply inverted — a condition that has preceded nearly every recession for the past 25 years — even as the Atlanta Fed’s GDPNow forecasting tool suggests the economy is growing at a 2.5% clip.
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The U.S. dollar index, which tracks the greenback against a basket of six global currency peers, was marked 0.03% higher at 106.608.
Retail sales will also be in focus again Wednesday as the Commerce Department publishes official July data prior to the start of trading that is likely to illustrate the impact of plunging domestic gas prices.
Headline retail sales are likely to have risen by around 0.1% on the month, economists suggest, as the overall tally falls from June’s $680.6 billion peak amid the ongoing slump in gasoline prices. Core retail sales, which strip out the impact of volatile components such as food and energy, may actually shrink by around 0.1%.
In other markets, oil prices extended their recent slide, pulling U.S. crude to within sight of a six-month low, ahead of weekly Energy Department data on domestic crude stocks at 10:30 am Eastern time.
WTI crude futures for September delivery were marked 22 cents lower at $86.44 per barrel while Brent contracts for October, the global benchmark, fell 36 cents to $91.98 per barrel.
In overseas markets, European stocks were also lower, with the Stoxx 600 falling 0.33% in Frankfurt trading, while overnight in Asia the region-wide MCSI ex-Japan index gained 0.16% and the Nikkei 225 rose 1.23% to re-take the 27,000 point level for the first time in seven months.
On Wall Street, futures tied to the S&P 500 are indicating a 36 point opening bell dip while those liked to the Dow Jones Industrial Average are priced for a 205 point retreat. Futures linked to the tech-focused Nasdaq are indicating a 130 point slip.
Target (TGT) shares slumped 3.5% lower after it posted much weaker-than-expected second quarter earnings as deep discounts put in place to shift excess inventory ate into the big box retailer’s bottom line.
Bed, Bath & Beyond (BBBY) shares, meanwhile, powered higher again Wednesday as the meme stock favorite extended gains following a bullish options bet from GameStop (GME) chairman Ryan Cohen.