US Futures Drop as Optimism Over Fed Minutes Wanes: Markets Wrap

(Bloomberg) — U.S. equity-index futures declined, and European stocks wobbled, after the Federal Reserve signaled a delicate balancing act that would see inflation-busting rate hikes continue despite a weakening economy.

Most Read from Bloomberg

September contracts on the S&P 500 and Nasdaq 100 slid at least 0.3% after the underlying benchmarks posted losses on Wednesday. The two-year Treasury yield, the most sensitive to monetary tightening, fluctuated as investors parsed some dovish elements in the minutes of the Fed’s latest meeting. The dollar rose for a second day and was on course for the biggest weekly gain since June 10.

While policy makers warned against over-tightening and signaled the potential for slower rate increases at some point, they also flagged the risk of inflation pressures becoming entrenched. The nuanced messaging wasn’t dovish enough for markets to sustain a risk-on stance into Thursday. Caution was the byword of the moment with further clues awaited at the Fed’s annual symposium in Jackson Hole, Wyoming next week.

“People are a little overly optimistic about how likely it is that we can solve the inflation problem quickly and in a way where we don’t have to include more policy and more rising rates,” Kathryn Kaminski, AlphaSimplex Group chief research strategist and portfolio manager, said on Bloomberg Television.

Swaps tied to Fed policy meeting dates indicated lower odds of a 75 basis points hike next month as opposed to a half-point move. Expectations of slower policy tightening and a pivot to cuts later next year have already contributed to a 12% jump in global stocks from June lows. The question is whether that’s too optimistic. A darker scenario may entail persistent price pressures forcing restrictive borrowing costs amid a shrinking economy

Europe’s Stoxx 600 index made a muted opening as stocks tied to economic growth such as raw-material companies, banks and industrial-goods makers slid. Concerns of tightening monetary conditions increased after the European Central Bank’s Governing Council member Martins Kazaks said rate hikes will continue in the region.

Treasuries struggled for direction. The two-year rate rose more than 3 basis points and fell almost 4 basis points before trading little changed. Britain’s pound and the euro fell against the dollar, signaling a continuing bid for haven assets amid worries over stagflationa.

Losses in Japan, China and a Hong Kong tech index sapped an Asian equity gauge. Goldman Sachs Group Inc. economists downgraded their forecast for China’s full-year expansion to 3% from 3.3%. The nation is hamstrung by a property crisis, rolling Covid curbs and stressed power supplies.

Chinese state media said local governments could sell more than $229 billion of bonds to fund infrastructure investment and plug budget gaps in a bid to shore up growth.

Crude oil was lower despite bullish signals from the US and the OPEC grouping of producers as signs of economic slowdown clouded the demand outlook. West Texas Intermediate futures traded below $88 a barrel.

Inflation remains the most closely-watched indicator in the second half. Will it come down gradually, or will it stay elevated, forcing the Fed to keep raising rates aggressively? Have your say in the anonymous MLIV Pulse survey.

Here are some key events to watch this week:

U.S. existing home sales, initial jobless claims, Conference Board leading index, Thursday
Fed’s Esther George, Neel Kashkari speak at separate events, Thursday

Some of the main moves in markets:

Stocks

The Stoxx Europe 600 was little changed as of 8:27 a.m. London time
Futures on the S&P 500 fell 0.3%
Futures on the Nasdaq 100 fell 0.4%
Futures on the Dow Jones Industrial Average fell 0.2%
The MSCI Asia Pacific Index fell 0.7%
The MSCI Emerging Markets Index fell 0.7%

Currencies

The Bloomberg Dollar Spot Index rose 0.2%
The euro fell 0.2% to $1.0155
The Japanese yen fell 0.1% to 135.19 per dollar
The offshore yuan fell 0.2% to 6.8080 per dollar
The British pound fell 0.3% to $1.2016

Bonds

The yield on 10-year Treasuries declined one basis point to 2.89%
Germany’s 10-year yield advanced three basis points to 1.11%
Britain’s 10-year yield was little changed at 2.29%

Commodities