US Futures Waver as Rate Bets Thrown Into Doubt: Markets Wrap

(Bloomberg) — Markets struggled for direction Tuesday as traders weighed prospects for a slowdown in the pace of US rate hikes against data that shows tighter policy may be needed for longer.

Most Read from Bloomberg

Contracts on the S&P 500 wavered following a third day of declines for the S&P 500 on Monday. A gauge of European equities turned lower as a seven-week rally lost steam. The dollar rose for a second day, signaling haven demand.

A resilient US economy and sticky inflation is countering optimism about a reopening in China, with money market futures and economists suggesting the Fed will need to push rates to a higher peak than previously expected.

“I think we are still not through the volatility we are going to see,” Hannah Gooch Peters, global equity investment analyst at Sanlam UK, said in an interview with Bloomberg TV. “Inflation is not under control yet.”

The S&P 500 remains on course for its biggest fourth-quarter gain since 1999, but gains have been receding in December after a stellar rally. The benchmark index has now traded lower for three consecutive days, with losses amounting to about 2% so far this month.

Bond yields paused their ascent, with the yield on 10-year Treasuries little changed at 3.57%. Strong US services data Monday fanned speculation for higher rates, pushing the benchmark yield past 3.5%.

Swaps showed an increase in expectations for where the Fed terminal rate will be, with the market indicating a peak above 5% in the middle of 2023. The current benchmark sits in a range between 3.75% and 4%.

Fed officials, now in their pre-meeting blackout, have strongly suggested they would downshift to a half-point move at their Dec. 13-14 gathering, after four straight 75 basis-point increases. They’ve also said they likely will need higher rates than they thought in September, when the median forecast saw them at 4.6% next year from a current target range of 3.75% to 4%.

Story continues

Meanwhile, Beijing announced it will scrap Covid testing requirements for most public venues in what is seen as an accelerated move toward the exit of Covid Zero policy.

“Risk assets may enjoy some degree of positive momentum from Asia, if developments continue to fuel optimism about a 2023 Chinese reopening,” rates strategists at Mizuho International Plc wrote in a note to clients.

Elsewhere, a majority of 291 respondents to the latest MLIV Pulse survey said leveraged loans would be the canary in the coal mine to indicate that corporate credit quality is getting worse.

About 28% of survey respondents expect defaults to jump significantly if US rates peak at or below 5%, which is about where the market bets the Fed will stop hiking. Another 63% see defaults surging if rates peak above 5%.

Key events this week:

• US trade, Tuesday

• EIA crude oil inventory report, Wednesday

• Euro zone GDP, Wednesday

• US MBA mortgage applications, Wednesday

• ECB President Christine Lagarde speaks, Thursday

• US initial jobless claims, Thursday

• US PPI, wholesale inventories, University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• Futures on the S&P 500 were little changed as of 5:33 a.m. New York time

• Futures on the Nasdaq 100 were little changed

• Futures on the Dow Jones Industrial Average fell 0.1%

• The Stoxx Europe 600 fell 0.6%

• The MSCI World index fell 0.3%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro rose 0.1% to $1.0506

• The British pound was little changed at $1.2178

• The Japanese yen was little changed at 136.65 per dollar

Cryptocurrencies

• Bitcoin was little changed at $16,970.6

• Ether fell 0.5% to $1,253.58

Bonds

• The yield on 10-year Treasuries was little changed at 3.57%

• Germany’s 10-year yield declined one basis point to 1.87%

• Britain’s 10-year yield was little changed at 3.10%

Commodities

• West Texas Intermediate crude fell 1.4% to $75.82 a barrel

• Gold futures rose 0.2% to $1,785.30 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Allegra Catelli, Michael Msika and Tassia Sipahutar.

Most Read from Bloomberg Businessweek

©2022 Bloomberg L.P.