U.S. stock index futures were muted on Thursday following a strong run on Wall Street this week and investors awaited fresh economic data to gauge the Federal Reserve’s monetary policy verdict next month.
Data reflecting labor market weakness has strengthened expectations that the central bank will potentially lower interest rates next month, despite another report suggesting underlying price pressures are on the rise.
The expectations for a dovish Fed encouraged investors to lap up riskier equities, sending the benchmark S&P 500 and tech-heavy Nasdaq to record highs in the previous two sessions, and putting the blue-chip Dow within striking distance of an all-time high.
Traders are fully pricing in a 25-basis-point interest rate cut by the central bank in September, according to the CME FedWatch tool, and expect cuts of a similar size in October and December.
Analysts are not so sure.
“The market is too complacent about the apparent certainty the Fed will cut next month, especially with inflation having been above target for 53 months running, and clearly moving in the wrong direction,” said Michael Brown, senior research strategist at Pepperstone.
A report also showed San Francisco Fed President Mary Daly pushed back against the need for a 50-basis-point interest rate cut next month, a day after Treasury Secretary Scott Bessent said an aggressive half-point cut was possible.
At 7:10 a.m. ET, Dow E-minis were down 2 points, or flat, S&P 500 E-minis were down 3.5 points, or 0.05 per cent, and Nasdaq 100 E-minis were down 13.25 points, or 0.06 per cent.
Focus is now on a string of data due at 8:30 a.m. ET, including weekly jobless claims and Producer Price Index for the month of July, at a time when markets are also concerned about the quality of economic data.
Some of the components of the producer inflation report feeds into the Fed’s preferred inflation gauge – the Personal Consumption Expenditures Price Index.
Wall Street’s recovery from April lows has also elevated valuations of the S&P 500 beyond long-term averages, aided by better-than-expected earnings from megacap companies and more clarity on trade deals.
“I retain my bullish equity bias. Frankly, it’s tough not to – earnings growth is impressive; the tone on trade is becoming much softer; the economy remains resilient; and, even if that final point falters, the Fed (has) plenty of room to ease,” said Brown.
Cisco Systems forecast first-quarter revenue above estimates, driven by the artificial intelligence boom. Shares were down 1 per cent in premarket trading.
Deere & Co fell 7.7 per cent after the farm-equipment maker reported a lower quarterly profit and tightened its annual profit forecast, while Tapestry plunged 12 per cent after the Coach handbag maker posted its annual profit forecast below estimates.
Both companies warned of tariffs impacting their business.
Later in the day, investors will also tune into remarks from St. Louis Fed President Alberto Musalem, a Federal Open Market Committee voting member this year.
A global stock rally paused as investors awaited data on U.S. producer prices later in the day that may show how tariffs are impacting inflation trends.
MSCI’s global share index flatlined, after hitting all-time peaks for the two previous sessions, while an equivalent gauge of Asian equities outside Japan lingered near its loftiest level since September 2021.
About 70 per cent of global investors expect U.S. stagflation to become the dominant market narrative within three months, a Bank of America survey found this week.
“Inflation is starting to come through. It’s not massive yet but that could certainly continue in coming months and amplify that part of the story,” Russell Investments global chief investment strategist Paul Eitelman said.
U.S. Treasury markets show investors are growing queasy about the damage higher-for-longer inflation could wreak on longer-dated debt, by eroding the real value of bonds’ fixed-interest coupons over time.
Two-year Treasury yields, which track monetary policy bets, traded at 3.67 per cent on Thursday, down from about 3.95 per cent at the beginning of August.
But yields on 30-year Treasuries, which are the most sensitive to inflation expectations, are now 112 bps higher than the two-year notes, with the yield differential having risen from about 95bps on Aug. 1.
The U.S. dollar was struggling to make headway from a two-week low against a basket of major currencies on Thursday and Japan’s yen made broad based gains, hitting its strongest in three weeks at 146.38 per dollar.
This came after Bessent said the Bank of Japan would raise interest rates because it was behind the curve in dealing inflation risks. The BOJ has so far justified keeping borrowing costs ultra-low because its underlying inflation measure that focuses on domestic demand and wages is below its target and it wants more clarity on how U.S. tariffs will impact exporters.
The euro stood at $1,16722, nudging off the previous day’s two-week high while European government debt largely tracked moves in Treasuries. Germany’s 10 year yield was down 2 bps at 2.66 per cent.
EYES ON UKRAINE
Commodities markets were subdued ahead of Friday’s summit between U.S. President Donald Trump and his Russian counterpart Vladimir Putin.
Trump on Wednesday threatened “severe consequences” if Putin did not agree to peace in Ukraine and has also floated the idea of a second summit that would include Ukrainian President Volodymyr Zelenskiy.
Brent crude, the global oil marker, traded at around $65.86 a barrel on Thursday, just off a two-month low and down from almost $70 in early August.
Spot gold prices, which tend to rise when investors focus on geopolitical risks, fell about 0.5 per cent to $3,3925 per troy ounce.
Goldman Sachs analysts wrote in a note to clients that lack of progress towards a Ukraine ceasefire could lead to renewed White House sanctions on Russian oil but this would only cause a “limited risk” of supply disruptions.
J.P. Morgan strategists said a peace deal could lift the euro against the dollar but warned that the bar for achieving a ceasefire was high.
Reuters
