US stock futures fell on Friday ahead of a widely anticipated speech by Federal Reserve chair Jay Powell that investors expect to provide guidance on the central bank’s strategy to fight inflation by raising interest rates.
Futures edged down along with European stocks in the hours before Powell’s address at the annual Jackson Hole central banking summit.
The Fed is trying to fight against the most vigorous spell of consumer price increases in around four decades, with inflation clocking in at 8.5 per cent in July. But policymakers are also trying to avoid tipping the world’s largest economy into a deep recession with their programme of aggressive rate rises.
Analysts at Bank of America said that the Fed was “likely to emphasise its commitment to price stability, even at the risk of recession” at Jackson Hole. “Powell is likely to say the pace of hikes could slow while emphasising restrictive policy and no quick pivot to cuts,” they added.
Futures contracts tracking Wall Street’s S&P 500 gauge and the technology-heavy Nasdaq 100 lost 0.4 per cent and 0.5 per cent respectively while the regional Europe Stoxx 600 share index was down 0.4 per cent by early morning in London.
With market participants awaiting Powell’s address at 3pm London time (10am New York time), US government debt came under pressure, as traders awaited signals about the future pace and direction of US monetary policy.
In government bond markets, the yield on the 10-year US Treasury note — seen as a proxy for borrowing costs worldwide — added 0.05 percentage points to 3.08 per cent on Friday as the price of the benchmark debt instrument slipped lower.
The dollar slipped 0.2 per cent against a basket of six other currencies, having marched higher in recent days on expectations of higher US interest rates. The euro added 0.4 per cent against the greenback to trade fractionally above parity.
Market pricing on Friday indicated that investors now expect the Fed to lift its main interest rate to 3.7 per cent by February 2023, up from projections as recently as early August of 3.3 per cent. The central bank’s current target range sits at 2.25 to 2.50 per cent, after two consecutive increases of 0.75 percentage points.
Traders are factoring in the possibility of a further 0.75 percentage point rise after the Fed’s September monetary policy meeting, with Powell’s language on Friday around inflation and the health of the economy likely to move those projections in either direction — particularly in the context of thin summer trading volumes.
Already, predictions of tighter policy and higher borrowing costs have started to weigh on investor sentiment in corporate debt markets.
The difference in yield between high-yield US corporate bonds and ultra low risk government debt has widened in recent weeks, rising from 4.2 percentage points on August 11 to 4.6 percentage points at the close of trade on Thursday, according to an Ice Data Services index. Junk bond funds recorded $4.8bn in outflows in the week to Wednesday, marking the biggest redemption in nine weeks, according to EPFR data collated by Bank of America.
BofA expects the Fed to raise borrowing costs by 0.5 percentage points in September.
Still, some suggested that Powell might not shed new light on the Fed’s strategy during his speech. “We’ll not learn a lot more than we already know,” said Jim Paulsen, chief investment strategist of The Leuthold Group. “The Fed’s going to raise rates again in September, they’re turning a little more dovish from what they’ve been but that’s not surprising considering how hawkish they’ve been.
“All that said, it’s undeniable that [the speeches] move markets. For day traders, it’s hugely important.”
Economists at Deutsche Bank did not anticipate that Powell would provide “explicit guidance” for the next Fed meeting but they expected the central bank chair to “skew his remarks in a hawkish direction to ensure the Fed’s inflation-fighting credentials are unquestioned”.
Fresh figures due for release later on Friday may also offer further clues about the health of the US consumer, with data due on personal income and spending due at 1.30pm London time.
