Market Snapshot: Stock futures stuck near two-week lows as Fed fears reverberate

What’s driving markets

Fed fretting was again smothering stock markets on Wednesday. Since hitting a near four-month high on August 16th, the S&P 500 has swiftly retreated 4.1% as investors feared their optimism that the Fed would slow its pace of rate hikes was misplaced.

“The reset of expectations has put the skids under what had been something of a recovery rally for the major indices, which remain well short of their opening 2022 levels,” said Richard Hunter, head of markets at Interactive Investor, in a morning note.

Comments late on Tuesday from Minneapolis Fed President Neel Kashkari reinforced concerns that the central bank was not minded to pivot to a more dovish trajectory anytime soon, despite signs headline inflation may have peaked and amid a rash of downbeat economic data this week.

“The changing narrative among investors is that even if the Fed succeeds in engineering a soft landing for the U.S. economy, rates could remain at elevated levels for longer, and until such time as the battle with inflation has been beaten beyond a doubt,” Hunter added.

The shift in Fed policy expectations have pushed up benchmark borrowing costs and helped force the ICE Dollar Index
DXY,
+0.03%
to fresh 20-year highs — both trends are often deemed damaging to U.S. equity valuations. Record high energy costs in Europe, which have raised fears of a recession in Germany, has also weighed on sentiment.

Still, equity derivative analysts at Bank of America reckon that the recent summer rally in stocks and bonds, which saw the S&P 500
SPX,
-0.22%
climb 17% off its mid-June trough and the 10-year Treasury yield
TMUBMUSD10Y,
3.033%
fall to 2.5%, has itself encouraged Fed chair Jay Powell and colleagues to be more hawkish.

“Giving them [the Fed] room to hike are financial conditions, which by some measures are near as loose as they’ve been during this hiking cycle. This is not new; it’s the “Fed call” dynamic we’ve been writing about all year (the Fed has implicitly sold a call on the market), where looser financial conditions require and allow the Fed to act more aggressively against inflation,” said BofA in a note.

“We think the current set-up creates a risk that the Fed hikes aggressively next month, and that Powell may try to point the market that way at Jackson Hole. Equities, in particular, may have more to lose as they have been the largest driver in the recent easing of financial conditions,” the BofA strategists concluded.

Fed chair Jay Powell is due to make a speech on Friday at the Jackson Hole symposium.

U.S. economic data on the slate for Wednesday include the July durable goods report, due 8:30 am Eastern, and the July pending home sales at 10 am Eastern.

And after the closing bel,l the market will receive earnings updates from a trio of once high-flying technology stocks: Nvidia
NVDA,
+0.86%,
Salesforce
CRM,
-0.55%
and Snowflake
SNOW,
+0.96%.

Meanwhile, the saga of meme-stock favorite Bed Bath & Beyond
BBBY,
-4.98%
took another twist after the Wall Street Journal reported the struggling retailer had lined up a financing source to shore up its liquidity.

How are other assets faring

• Oil futures were higher with U.S. crude
  CL.1,
  +1.45%
  adding 0.7% to $94.36 a barrel, ahead of the U.S. weekly energy inventory data due at 10:30 am Eastern.

• The 10-year Treasury yield
  TMUBMUSD10Y,
  3.033%
  dipped less than 1 basis point to 3.044% and German 10-year bund yields
  TMBMKDE-10Y,
  1.319%
  rose 3 basis points to 1.35%.

• Gold
  GC00,
  +0.19%
  dipped 0.1% to $1,760 an ounce.

• Bitcoin
  BTCUSD,
  -0.54%
  fell 0.7% to $21352.