Wall Street looks set to open cautiously higher Thursday as investors parse details of the Fed’s near-term strategy to tame the fastest inflation in forty years.
U.S. equity futures edged higher Thursday, while the dollar advanced to a fresh two-year high against its global peers and Treasury bond yields eased, as investors picked through details of minutes from the Federal Reserve’s last policy meeting and geared-up for the start of the first quarter earnings season early next week.
Fed Governors essentially agreed to reduce the central bank’s $9 trillion balance sheet by $1 trillion a year, selling $95 billion in assets to the market each month, while moving to ‘expeditiously’ raise interest rates in order to arrest the fastest domestic inflation rates in forty years.
The hawkish tone of the minutes — including a reference to the fact that, but for the disruption of Russia’s invasion of Ukraine on global markets, the Fed would have raised rates by 50 basis points last month — cemented the case for faster and deeper rate hikes over the next three policy meetings, with the odds of a 50 basis point move in May now pegged at 81%.
“As the Fed reduces bond holdings, the Treasury will need more private buyers of government bonds to roll over the federal debt and finance incremental borrowing,” said Bill Adams, chief economist at Comerica Bank in Toledo, Ohio. “All things equal, more bond supply on the open market will tend to push bond prices lower and bond yields higher.”
“This will drain some liquidity from financial markets where the Fed has been worried about exuberant valuations recently, including both traditional asset classes as well as crypto and NFTs,” he added.
Curiously, even after the aggressively-worded Fed minutes, U.S. Treasury bond yields eased in overnight trading, taking 10-year notes to 2.596% and pegging the gap between 2-yeat notes yields at +13 basis points, a stark reversal to the inversion traders were pricing-in just a few sessions ago.
That move might be explained by the fact that, with the March jobs reports and Fed minutes behind it, the market can now shift focus to the start of earnings season next week, with analysts looking for collective S&P 500 profits to rise 6.4% from last year to a share-weighted $407.4 billion.
Elsewhere, oil prices were back on the march, even as the dollar held gains in overnight trading, as supply constraints linked to Russia’s war on Ukraine, and the prospect of energy sector focused sanctions offset a modestly bigger-than-expected increase in domestic U.S. crude stocks.
WTI futures contracts for May delivery were marked $1.49 higher on the session at $97.72 per barrel while Brent contracts for June jumped $1.25 to $102.35 per barrel.
Heading into the start of the Thursday session on Wall Street, however, futures contacts tied to the Dow Jones Industrial Average indicating a modest 5 point opening bell dip while those linked the S&P 500, which is down 6% for the year, are priced for a 7 point bump to the upside. Futures linked to the tech-focused Nasdaq are looking at a 60 point opening bell gain.
HP Inc. (HPQ) – Get HP Inc. Report shares soared 15% after Securities and Exchange Commission filings revealed that billionaire investor Warren Buffett has built a $4.2 billion stake in the printer and PC maker.
Samsung Electronics forecast its strongest first profit in four years as surging chip demand offset uncertainties in the global smartphone market.
Levi Strauss (LEVI) – Get Levi Strauss & Co. Class A Report shares jumped 3% after the iconic clothing maker posted stronger-than-expected first quarter earnings thanks in part to higher pricing and lower marketing costs.
In overseas markets, Europe’s Stoxx 600 gained 0.7% by mid-day trading in Frankfurt while last night’s sell-off on Wall Street pulled the region-wide MSCI ex-Japan index 1.4% lower by the close of trading.
