Equity Rally Fizzles as Caution Over Fed Dominates: Markets Wrap

(Bloomberg) — US equity-index futures traded weaker as investors debated whether inflation had eased enough to encourage the Federal Reserve to slow monetary tightening.

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Contracts on the S&P 500 and Nasdaq 100 index fell about 0.1% each after Tuesday’s rally in US stocks on the back of a fifth month of decline in consumer-price growth. Treasuries rallied for a second day, while the dollar slipped. The Stoxx Europe 600 Index dropped for the second time in three days. Charter Communications Inc. declined 4.5% in premarket New York trading amid concern its capital-spending plan may crimp cash flow.

While a softer-than-expected figure for US consumer price index stoked a rally across stocks and bonds, the gains were tempered by caution that the Fed may still remain resolute on continuing rate hikes. After a 50 basis-point increase in Fed’s policy rate later Wednesday was firmly priced in, traders remained on the edge over what signals policymakers may offer on when the hikes will stop and whether a rate cut is possible next year.

“The question is, with inflation still at generational highs, will the Fed walk through that door?” Stephen Innes, managing partner at SPI Asset Management, wrote in a note. “After an initially high-spirited response, the relatively muted reaction for stocks is likely attributable to pre-risk event positioning, prevailing bearish growth sentiment, technical factors and the devil in the details.”

Europe’s equity benchmark fell after posting the biggest single-day advance since Nov. 10 as caution prevailed over Fed’s messaging later in the day as well as expectations for rate hikes by the European Central Bank and Bank of England on Thursday.

Treasuries with medium-term maturities, called the belly of the yield curve, posted the biggest gains Wednesday. The five-year rate shed 4 basis points, while its seven-year counterpart was 3 basis points lower. Traders are betting that the Fed, after today’s move, will opt for 50 basis points more of hikes, and then an equivalent-sized cut by the end of next year.

Charter Communications Inc., the second-largest US cable TV provider, fell in early trading after saying it will spend $5.5 billion to bring higher-speed broadband connections to customers. Higher capital expenditure and lower cash flow create near-term uncertainty, yet expanding the footprint could fuel subscriber growth, Bloomberg Intelligence analysts said.

In the UK, government bonds rallied across the curve, with the two-year yield falling 4 basis points. Inflation in the country fell from a 41-year high in November, raising the possibility that the worst of the cost-of-living squeeze is over.

The dollar traded 0.3% lower. The New Zealand dollar fell in a decline that accelerated after the government warned a recession was likely next year.

Shares in Hong Kong, Japan and Australia held advances, nudging the MSCI Asia Pacific index toward a three-month high and a close of 19% above its October low.

Jitters over Fed policy echoed in the oil market, where West Texas Intermediate futures halted a two-day advance. Traders also weighed the demand outlook amid a rapid relaxation of Covid restrictions in China against the effect of new cases on economic activity in the country.

Key events this week:

FOMC rate decision and Fed Chair news conference, Wednesday
China medium-term lending, property investment, retail sales, industrial production, surveyed jobless, Thursday
ECB rate decision and ECB President Lagarde briefing, Thursday
Rate decisions for UK BOE, Mexico, Norway, Philippines, Switzerland, Taiwan, Thursday
US cross-border investment, business inventories, empire manufacturing, retail sales, initial jobless claims, industrial production, Thursday
Eurozone S&P Global PMI, CPI, Friday

Some of the main moves in markets:

Stocks

The Stoxx Europe 600 fell 0.6% as of 9:48 a.m. London time
Futures on the S&P 500 dropped less than 0.1%
Futures on the Nasdaq 100 fell 0.1%
Futures on the Dow Jones Industrial Average were little changed
The MSCI Asia Pacific Index rose 0.9%
The MSCI Emerging Markets Index rose 1.1%

Currencies

The Bloomberg Dollar Spot Index fell 0.3%
The euro rose 0.3% to $1.0663
The Japanese yen rose 0.3% to 135.15 per dollar
The offshore yuan rose 0.2% to 6.9490 per dollar
The British pound rose 0.3% to $1.2401

Cryptocurrencies

Bitcoin rose 0.2% to $17,793.15
Ether was little changed at $1,319.45

Bonds

The yield on 10-year Treasuries declined one basis point to 3.49%
Germany’s 10-year yield advanced three basis points to 1.96%
Britain’s 10-year yield declined two basis points to 3.28%

Commodities

Brent crude fell 0.2% to $80.52 a barrel
Spot gold fell 0.1% to $1,808.58 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Richard Henderson, James Hirai and Georgina Mckay.