US stock futures faltered as investors awaited the latest economic prospects from the Federal Reserve and any signs of interest rates and bond purchases for years to come.
Futures linked to the broad S&P 500 index and the Dow Jones Industrial Average were relatively stable, suggesting that benchmarks may be unstable after the market opens. Both meters recorded warm drops on Tuesday, a day after closing at record highs. High-tech Nasdaq-100 contracts fell 0.3% on Wednesday.
Federal Reserve officials, who are scheduled to release their latest economic projections at 2 pm Eastern time, are likely to say that they expect the labor market and inflation to recover faster than anticipated in December. The central bank must reaffirm its commitment to ultra-low interest rates and bond purchases for now.
Money managers have already started pricing an increase in inflation, leading to a sale of government bonds, and are betting that interest rates will start to rise at the end of next year. They also started to move out of stocks that appear to be very well rated after last year’s hike.
“Markets in general are expensive today, and that depends on central bank support,” said Hugh Gimber, strategist at JP Morgan Asset Management. “So this whole market is very, very sensitive to changes in central bank policy.”
A spot chart of the Fed’s policymakers’ projections may show that some officials expect a first-line increase in 2023, said Gimber. “But the key will be communication: how are they going to balance this modestly brighter outlook while signaling that the Fed is still there to support the markets?”
In bond markets, the yield on the 10-year US Treasury benchmark note rose to 1.644%, from 1.622% on Tuesday. Yields increase as the price falls. Yield rose sharply from this year’s low of 0.915% on January 4.
Hints and signals from Fed chairman Jerome Powell at his press conference, which begins at 2:30 pm, will be critical for investors.
“These are less dovish predictions, but still dovish communication, so Powell is really walking a tightrope,” said Gimber. “Powell will use his comments to avoid an overreaction in the bond market.”
Investors have begun in recent weeks to reshape their portfolios, as economic prospects are reinforced by large sums of government stimulus spending and the launch of vaccination against coronavirus. This boosted bets on the underdeveloped and economically sensitive sectors of the market, while the rise in high tech stocks has weakened.
Traders worked on the New York Stock Exchange on Tuesday.
Photograph:
Colin Ziemer / Associated Press
“The markets basically ran as fast as they could to anticipate the 2021 recovery. For the most part, the market saw what it wants,” said Tim Courtney, chief investment officer at Exencial Wealth Advisors. “Everything is based on interest rates now: we are entering an economic recovery and rates are normalizing and rising, which will favor economically sensitive companies.”
Before the meeting, investors will also analyze data on the beginning of the US housing market for clues about the strength of the economy. The figures, due at 8:30 am ET, are expected to show that new residential building projects fell slightly in February from the previous month.
Brent oil, an international benchmark for oil, fell 0.8% to $ 67.87 a barrel.
In foreign markets, Stoxx Europe 600 fell 0.4% below.
In Asia, most of the main indices have changed little at the close of trading. South Korea’s Kospi index fell 0.6%, while the Shanghai Composite, Hang Seng and Nikkei 225 indexes ended the day practically stable.
Write to Will Horner at [email protected]
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