US stock futures were muted on Wednesday, swinging between modest gains and losses, one day after a market rout was sparked by yesterday’s warning from Fed Chair Jerome Powell that the pace of interest-rate increases may need to re-accelerate. S&P 500 futures down up 0.1% by 7:45 a.m. ET while Nasdaq futures were modestly in the green, showing marginal improvements in investor sentiment after Tuesday’s selloff, when the S&P 500 suffered the biggest decline in two weeks. The Bloomberg Dollar Spot Index was little changed near the highest in more than two months, as treasury yields climbed across the curve, pulling global bond markets along with them. Oil was flat while gold and Bitcoin fell extended their fall.
In US premarket movers, Crowdstrike rose after the cybersecurity software company reported results and a forecast that beat expectations. WeWork shares also gained after Bloomberg News reported that the workspace rental company is in talks to raise hundreds of millions in capital to support the business. Meanwhile, Tesla dropped after Berenberg downgraded the electric vehicle maker to hold from buy, saying the shares now have less upside potential and more limited room for disappointment; also impacting Tesla was an AP report that the NHTSA had opened a probe for steering wheels that can fall off. Here are other notable premarket movers:
US stocks dropped on Tuesday after Powell said the ultimate level of interest rates is likely to be higher than previously anticipated after economic data came in stronger than expected. Powell speaks to Congress again later in the day, and for the March 21-22 Fed meeting futures trading suggests a 50 basis-point rate increase is more likely than 25 — the magnitude of the Fed’s last move, although JPMorgan’s Bob Michele says a Fed reversion to 50 bp hikes would be "pretty confusing." Meanwhile, money markets are now pricing US interest rates to rise above 5.6% later this year.
“We would be foolhardy to expect we can’t reach 6% on Fed rates, and clearly that has an impact on asset markets across the globe,” Rabobank strategist Jane Foley told Bloomberg Television. If the Fed has to work harder to get inflation down, “that certainly does imply recession,” she added.
“The market now seems fairly convinced that there will be some sort of recession, but the employment data is still very strong,” said Roger Lee, head of UK equities at Investec Bank PLC. “There is this dilemma in the market; clearly recession risk is going up, because interest rate expectations are going up, but cyclicals have performed well this year, and that’s inconsistent with the yield inversion. There’s a tension there in the market causing a lot of uncertainty.”
Following the Tuesday selloff, the S&P 500 fell below 4,000, and a break below the 3,900 level can lead to an increase in selling pressure as this level has been a significant turning point for the US benchmark since May 2022, according to JPMorgan traders. It will all depend on the data, however: with US housing and employment data coming later today, and jobs data on Friday, investors will likely look to these as the next gage of probability for the path of interest rates. Meanwhile, rising US treasury yields are also putting further pressure on equities markets, with yield on the 2-year treasury note reaching 5% on Tuesday for the first time since 2007.
“In the US, bond yields versus S&P 500 yield are virtually the same, so equities look unattractive,” said Joachim Klement, strategist at Liberum Capital Ltd. “In the US, the risk premium for holding stocks has declined to levels seen around 2008, very low. Whereas in Europe, it is at levels pretty similar to 2015-16. That’s simply a reflection of the fact that Europe and UK haven’t hiked as aggressively as the US.”
European stocks were on course for a third consecutive decline following Fed Chair Jerome Powell’s hawkish message. The Stoxx 600 is down 0.3% with real estate, chemicals and utilities the worst-performing sectors. Here are the most notable European movers:
Sanford C. Bernstein strategists led by Sarah McCarthy said that while the equity risk premium has fallen in recent years, European stocks are still more attractive relative to bonds but that’s no longer the case in the US. BlackRock Inc. and Schroders Plc are among those who are weighing in on the debate of what will happen if US rates peak at 6%.
Earlier in the session, Asian equities also fell as hawkish comments from the Federal Reserve hurt appetite for risk assets, with China’s technology shares bearing the brunt of the selloff. The MSCI Asia Pacific Index declined as much as 1.5%, the most in three weeks, dragged by Tencent, Alibaba and Meituan. Fed Chair Jerome Powell told the Senate Banking Committee that the ultimate level of interest rates is likely to be higher than previously anticipated. Traders have since hiked their estimates on the terminal rate, with expectations for it to peak at about 5.6% in September. Stock gauges in Hong Kong and South Korea led losses in the region, while Japanese benchmarks were in positive territory. Still, regional emerging markets should get some buffer from lower inflation and close-to-peak interest rates.
Developed market “tightening will lead to slower growth and, ultimately, to cyclical recessions in the US, Europe and the UK later this year or next year,” said Matthew Quaife, head of multi asset investment management for Asia at Fidelity International. Emerging Asia, on the other hand, has the advantages of “falling inflation, peak monetary tightening, and attractive valuations,” he wrote in a note. The MSCI Asia gauge has been falling for two days, with sentiment shaky after a selloff in February stalled its rebound. The measure is struggling to cross its 50-day moving average amid concerns over the Fed’s policy path and a lack of major catalysts from the National People’s Congress in China.
Japanese stocks climbed after Federal Reserve Chair Jerome Powell’s hawkish remarks on interest rates weakened the yen to its lowest in more than two months. The Topix Index rose 0.3% to 2,051.21 as of the market close in Tokyo, while the Nikkei advanced 0.5% to 28,444.19. Sony Group Corp. contributed the most to the Topix Index gain, increasing 0.6%. Out of 2,160 stocks in the index, 1,436 rose and 615 fell, while 109 were unchanged.
In Australia, the S&P/ASX 200 index fell 0.8% to close at 7,307.80, weighed by declines in mining and energy shares. The broad-based selloff comes after hawkish rhetoric from Federal Reserve Chair Jerome Powell hurt appetite for risk taking. Meanwhile, the RBA has a “completely open mind” about its April policy meeting and will be guided by key economic data on whether to raise interest rates further or pause tightening, Governor Philip Lowe said at a conference in Sydney. Read: RBA’s Lowe Has ‘Open Mind’ on April Rate Pause, Says Data Is Key In New Zealand, the S&P/NZX 50 index fell 0.5% to 11,855.54.
Stocks in India were among few gainers in Asia as the benchmark Sensex advanced for a third consecutive session, helped by gains in index-heavy ITC and Larsen & Toubro. All of 10 companies controlled by the Adani Group advanced after prepayment of $902 million worth of borrowings by the founding family. The S&P BSE Sensex erased a loss of as much as 0.6% to close 0.2% higher at 60,348.09 in Mumbai. The NSE Nifty 50 Index advanced by a similar measure. Thirteen of the 20 sector sub-gauges rose, led by utilities and power companies. Realty stocks were the worst performers. Tobacco and consume goods makers ITC contributed the most to the Sensex’s gain, increasing 1.1%. Out of 30 shares in the Sensex index, 17 rose, while 13 fell.
In FX, the Bloomberg Dollar Spot Index was little changed as the greenback traded mixed against its Group-of-10 peers. Rabobank’s Jane Foley predicted that dollar strength would filter through to emerging economies, which could find themselves having to tighten policy further. “That leads to the impression global growth will also be slowing,” she said.
In rates, treasury yields were slightly higher, erasing a bigger spike earlier in the session which briefly pushed the 10Y back over 4.0%, with losses led by front-end as two-year yields rise another 3bps at 5.04% after Tuesday’s aggressive flattening move was extended during Asia session and European morning. 2-year yields cheaper by 3.4bp, deepening inversion of 2s10s by 3bp to -107bps with 5s30s flatter by 1.6bp; 10-year yields around 3.97% slightly cheaper vs Tuesday’s close with bunds and gilts outperforming by 2bp and 3bp in the sector. 2s10s spread reached -107.9bp, a new four-decade lows, while 5s30s breached last year’s low reaching -47.4bp, deepest inversion since 2000.
UK and German two-year yields are both higher by 3bps; in UK, money markets price in a 5% BOE peak rate for the first time since October, while core European front-end trades cheaper tied to Treasuries repricing. Bunds and Italian bonds saw minor yield upticks in the front end of the curves while they were little changed further out. In the US, the Treasury auction cycle continues with $32b 10-year note reopening at 1pm, concludes with $18b 30-year reopening Thursday. WI 10-year at 3.975% is above auction stops since November and ~36bp cheaper than February’s result.
In commodities, oil held onto its losses following Powell's hawkish coments; WTI hovered around $77.50. Diversey Holdings and Permian Resources are among the most active resources stocks in early premarket trading, gaining 39% and falling 4.1% respectively. Gas markets are mixed with TTF firmer while Henry Hub is softer but remains above the USD 2.50/MMBtu mark. Spot gold is flat near $1,1814
Looking to the day ahead now, we’ll hear from Fed Chair Powell again, who’s appearing before the House Financial Services Committee. Otherwise, we’ll hear from the Fed’s Barkin, ECB President Lagarde, the ECB’s Panetta and the BoE’s Dhingra. There’s also a policy decision from the Bank of Canada. On the data side, at 7 a.m., we got mortgage applications data which showed a 7.4% bounce after last week's 5.7% drop, followed by the ADP employment report at 8:15 a.m. and JOLTs job openings figures are 10 a.m. The US will sell $32 billion of 10-year notes at 1 p.m. In Canada, the central bank is due to deliver a rate decision at 10 a.m. New York time. Over in Europe, we got German industrial production (which beat) and retail sales (which missed) for January.
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Asia-Pac stocks were mostly lower amid headwinds from Wall St where risk assets suffered after Powell's hawkish testimony in which he put a 50bps hike for March in play and flagged higher terminal rate projections. ASX 200 was negative with the declines led by underperformance in the commodity-related sectors, in particular, energy after a slump in underlying oil prices, while comments from RBA Governor Lowe failed to appease investors despite opening the door for a pause at the next meeting as he also noted that it will depend on the data and that further tightening is likely to be required to return inflation to the target. Nikkei 225 bucked the trend with the index kept afloat on currency effects and as record current account and trade deficits in Japan add to the case for a slow exit from the BoJ’s ultra-easy policy. Hang Seng and Shanghai Comp. conformed to the downbeat mood with Hong Kong heavily pressured by weakness in property stocks and tech amid the higher global yield environment and considering that the HKMA would have to move in lockstep should the Fed turn more aggressive. Foxconn (2317 TT) is reportedly in discussions with the Indian gov't about setting up a plant on its own, without any gov't assistance, via Economic Times.
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European bourses are mixed within very narrow parameters with sentiment generally tentative post-Powell and ahead of US ADP and numerous Central Bank speakers. Stateside, futures are in-fitting with their European peers, ES +0.1%, with Powell due to testify to the House in which he is likely to repeat Tuesday's hawkish Senate testimony. China PCA Retail Passenger Vehicle Sales (Feb): 10.4% Y/Y (vs prelim 9.0% Y/Y; vs -37.9% Y/Y in January); CPCA says Tesla (TSLA) exported 40.5k China-made vehicles in February (prev. 39.2k MM)
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DB's Jim Reid concludes the overnight wrap
Morning from a surprisingly snowy Surrey this morning. My commute into London is going to be interesting as soon as I send this. Even rarer than snow in Southern England in March, it was another landmark day in markets yesterday, especially for the yield curve, as the US front end hawkishness revved up yet another gear after Powell's first testimony of the week. US terminal has now gone past our street leading 5.6% forecast and closed at 5.624% (+14.8bps) last night (5.66% this morning). With US 2yr yields up +12.2bps and 10yr yields +0.06bp we saw a significant further inversion and the curve closed below -100bps (-104.9bps) for the first time since 1981. 2 and 10yr yields are up another +5.5bps and +3bps overnight with the curve breaking through -107bps.
Bear in mind that on all the previous occasions that the 2s10s has been more than -100bps inverted since data is available from the early 1940s (1969, 1979, 1980 and 1981) a recession has either been underway, or has occurred within a maximum of 8 months. To highlight the rarity of such an occurrence, there have only been 7-month end closes lower than -100bps in 80 years of available data. So we are in rarefied air.
In terms of the specifics of Powell's comments, the biggest takeaway was his openness to larger hikes again, saying that “we would be prepared to increase the pace of rate hikes” if the data indicated. And he also pointed to a higher terminal rate as well, saying that “the ultimate level of interest rates is likely to be higher than previously anticipated.”
Those remarks from Powell mark a significant pivot for the Fed. Last year they signalled and then delivered a slowdown in rate hikes, moving away from four consecutive 75bp moves to 50bps in December, and then 25bps at the last meeting. Up to that point, all the indications had been that they wanted to move cautiously and assess the cumulative impact of what they’d delivered so far. In essence, the signal was that any further hikes would be at a 25bps pace until they stopped. But yesterday’s testimony explicitly opened the door to a more hawkish reaction function, which throws open several tail outcomes that had previously been closed off. See our economists' review of his comments yesterday, and what it might mean for Fed policy here. Powell speaks again today at the House Finance Committee but it's hard to see much new news coming after yesterday's remarks. The JOLTS data today might be the most important event for monetary policy.
With a larger hike now in play for the next meeting, futures adjusted accordingly and a +40.7bps move is now priced in for March. That’s closer to 50 than 25, so it implies that investors view a 50bps move as the more likely outcome now. However, remember that before the next meeting in two weeks time, we’ve still got another jobs report on Friday as well as the CPI print next week, so there’s still plenty of evidence that could easily tip the 25 vs 50 debate one way or the other.
With more Fed hikes being priced in, as already briefly mentioned, Treasuries experienced a significant selloff, with the 2yr yield (+12.2bps) hitting 5.0% for the first time since June 2007 and closing at 5.01%. That said, for 10yr Treasuries, yields were basically flat on the day (+0.06bps) with the dramatic flattening likely pricing in the higher risk of a policy error and hard landing. The increase in fed futures pricing also saw inflation expectations reprice lower with the US 2y breakevens falling -10.4bps to 3.28%. That was the first meaningful drop since the first week of February when it was at 2.3%.
The prospect of more rate hikes took the steam out of the recent equity rally, with the S&P 500 (-1.53%) ending its run of three consecutive advances with its largest daily loss in two weeks. The declines were incredibly broad-based, with just 30 companies in the entire index moving higher on the day. Similarly to the day before, non-cyclical industries outperformed with consumer staples (-1.0%) the “best” performing sector while cyclicals such as banks (-3.6%), autos (-2.8%), and materials (-2.0%) declined. There were similar losses for both the NASDAQ (-1.25%) and the Dow Jones (-1.72%) as well. In Europe the STOXX 600 fell -0.77% and missed the last 0.5pp of the US equity sell-off.
Unlike in the US however, European sovereign bonds actually put in a fairly strong performance. For instance, yields on 10yr bunds (-5.7bps), OATs (-4.7bps) and BTPs (-4.8bps) all saw a substantial decline on the day. That was driven in part by very good news on inflation expectations, with the ECB’s latest Survey of Consumer Expectations showing a decline in January. In particular, median expectations at the 3yr horizon came down to 2.5%, having been at 3.0% in December. That’s their lowest level since May 2022, although there are still big questions as to whether this will prove to be sustained, since the 1yr expectation only fell a tenth to 4.9% (vs. 5.0% in December).
Overnight in Asia, Japanese equity markets are the only bright spot with most of the region otherwise selling off amid the overnight advances in US rates. The Nikkei 225 (+0.44%) is posting solid gains just as the Hang Seng (-2.53%), the Shanghai Composite (-0.48%) and the Kospi (-1.26%) are sliding. US equity futures are steady, with S&P 500 contracts (+0.03%) almost unchanged.
There wasn’t much in the way of data yesterday, but German factory orders unexpectedly grew by +1.0% in January (vs. -0.7% expected). That was driven by a rise in foreign orders of +5.5%, whereas domestic orders fell by -5.3%.
To the day ahead now, and we’ll hear from Fed Chair Powell again, who’s appearing before the House Financial Services Committee. Otherwise, we’ll hear from the Fed’s Barkin, ECB President Lagarde, the ECB’s Panetta and the BoE’s Dhingra. There’s also a policy decision from the Bank of Canada. On the data side, releases from the US include the ADP’s report of private payrolls for February, the JOLTS job openings for January, and the trade balance for January. Over in Europe, there’s also German industrial production and retail sales for January.