Stocks are looking to close out the week on a high note, but with options expiry later today, and the steepest inverted yield curve in decades, traders remain cautious.
U.S. equity futures moved firmly higher Friday as investors looked to claw back losses from a muted week for stocks while closely tracking both the dollar and Treasury bond markets amid a seemingly renewed hawkish stance from the Federal Reserve.
Stocks are on pace for a modest weekly decline, pushed lower by rising bond yields and bets on a longer series of rate hikes from the Fed as its toughens its inflation stance in the face of a resilient jobs market and robust consumer spending.
St. Louis Fed President James Bullard, in fact, said that not only have the current run of rate hikes — the most in more than a generation — had only “limited” impact on inflation, but the current policy rate remains a long way from being “sufficiently restrictive” to bring inflation back to the Fed’s preferred 2% target.
The comments, while perhaps outside the Fed’s central thesis, have nonetheless sparked a change in bets as to when, and at what level, the central bank will stop raising rates next year, with new estimations of a 5.25% ‘terminal’ Fed funds rate now taking shape.
That will ostensibly add pressure on stocks in the weeks ahead, particularly given next week’s Thanksgiving Day holidays and the lack of market liquidity, and the following weeks before the Fed’s next policy meeting in December.
“It is obvious, that the Fed is out trying to dampen expectations following the rally on the lower than estimated US October inflation print,” Saxo Bank strategists wrote Friday. “Next week has the Thanksgiving holiday in the US, which usually sees light trading from Wednesday through Friday and the first key data is not up until the week after, so upcoming catalysts are not readily evident.”
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For the time being, however, a modest overnight pullback in the U.S. dollar, which traded 0.15% lower against its global peers at 106.531, as well as steadying Treasury yields has stocks on the move.
Benchmark 10-year Treasury note yields were holding at 3.795%, but remain some 69.3 basis points lower than 2-year paper, the steepest “inversion” of the year curve since the early 1980s and a further indication that traders are pricing in near-term recession risks for the world’s biggest economy.
Futures contracts tied to the S&P 500 are priced for a 36 point opening bell jump while those linked to the Dow Jones Industrial Average are indicating a 233 point advance. The tech-heavy Nasdaq is priced for a 115 point gain.
Stocks will also likely see some late-hour movement amid the regular expiration of options that represent around $2.1 trillion in underlying assets in what could be record volumes for Chicago Board Options Exchange (CBOE).
Overnight in Asia, rising Covid infections in China, as well as an unnerving missile launch from North Korea during the Asia-Pacific Economic Cooperation (APEC) summit in Bangkok, kept a lid on regional gains, with the MSCI ex-Japan index rising 0.22% into the close of trading.
Japan’s Nikkei 225 closed 0.11% lower following data showing the country’s inflation rate hit a forty-year high of 3.6% last month.
In Europe, stocks were modestly firmer, but still on pace for a weekly decline, as European Central Bank President Christine Lagarde said raising rates “may not be enough” to slow the region’s record-high inflation rates during an address in Frankfurt, suggesting moves to restrict growth could follow.
We expect to raise rates further – and withdrawing accommodation may not be enough,” Largarde said. “Ultimately, we will raise rates to levels that bring inflation back down to our medium-term target in a timely manner.”
The region-wide Stoxx 600 was marked 1.17% higher in mid-day trading.
