Futures fall as hawkish Fed, smaller China rate cut dent sentiment

By Shristi Achar A and Shubham Batra

(Reuters) -U.S. stock index futures fell on Tuesday as hawkish remarks from Federal Reserve officials last week kept investors jittery as they returned after a long weekend, while a smaller-than-expected rate cut in China further dented sentiment.

Fed Governor Christopher Waller warned on Friday “core inflation is not coming down like I thought it would.” Richmond Fed President Thomas Barkin said he was “comfortable” with further rate increases given that inflation was still not on the path back to 2%.

Traders see a 74% chance of just one 25-basis-point rate hike this year, expected in July, even as the U.S. central bank has signaled that borrowing costs could rise as much as half a percentage point by year-end, according to CMEGroup’s Fedwatch Tool.

The S&P 500 and Nasdaq ended lower on Friday, weighed down by Microsoft and other market heavyweights as comments from Waller and Barkin curtailed optimism that the central bank was nearing the end of its aggressive interest rate hikes.

Markets now await comments from more Fed officials including Fed Vice Chair Michael Barr later in the day, and Fed Chair Jerome Powell’s semiannual monetary policy testimony to the U.S. House Financial Affairs Committee on Wednesday.

Housing starts report is also due at 8:30 a.m. ET.

“Investors are starting off a new holiday shortened week coming off of strong gains, and looking ahead to a couple of days of Powell on Capitol Hill,” said Art Hogan, chief market strategist at B Riley Wealth.

“He (Powell) will be very careful to talk about what the current consensus is around the table at the Fed at the last meeting, because there’s still plenty of data for them to disseminate between now and the next meeting in July.”

Adding to the dour mood, China cut its benchmark lending rates by a smaller-than-expected 10 basis points. This was the first cut in the country’s prime rates in 10 months as it seeks to shore up its economic recovery.

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U.S.-listed shares of Chinese companies including Alibaba Group, JD.com and PDD Holdings fell between 1% and 6% in premarket trading.

Alibaba Group also said Daniel Zhang would step down from his roles as CEO and chairman to focus on the company’s cloud division.

At 7:24 a.m. ET, Dow e-minis were down 114 points, or 0.33%, S&P 500 e-minis were down 15 points, or 0.34%, and Nasdaq 100 e-minis were down 55.5 points, or 0.36%.

Adobe Inc lost 0.8% following a report that European antitrust regulators were preparing to launch a formal investigation into the Photoshop software maker’s $20 billion buyout deal for cloud-based designer platform Figma later this year.

Shares of U.S. automobile firms including Ford Motor, General Motors and Tesla Inc slid between 0.7% and 1.0% as a group of American lawmakers plans to urge CEOs of these companies to cut reliance on Chinese auto parts.

Dice Therapeutics Inc jumped 38% after Eli Lilly and Co said it would buy the drugmaker in an all-cash deal for about $2.4 billion to beef up its autoimmune treatment portfolio.

(Reporting by Shristi Achar A, Shubham Batra and Johann M Cherian in BengaluruEditing by Vinay Dwivedi)