U.S. stock futures firm after Nasdaq hits 2-year low and traders await inflation data

What’s driving markets

Buyers returned tentatively to U.S. equity index futures after chronic concerns about the Fed continuing to hike interest rates, as it battles to crush inflation, had pushed stock benchmarks to fresh lows.

The tech-heavy Nasdaq Composite has been particularly badly hit in the latest selloff, down 34% from its record high and falling to its lowest level since July 2020, with traders balking at often rich valuations amid a period of higher borrowing costs.

The 10-year Treasury yield
TMUBMUSD10Y,
3.921%,
which started the year around 1.65% was trading at 3.929%, off 1.6 basis points, on Wednesday as traders awaited U.S. September producer prices data due at 8:30 am Eastern Time, and consumer prices numbers on Thursday at the same time.

Stubbornly high readings for those reports are likely to exacerbate fears about additional Fed rate rises and rattle markets some more, said analysts.

“Equities have become incredibly fragile, as knock-on effects from central bank tightening further pressure equity risk premia higher (lower multiples). And investors generally fear that inflation is not falling at a pace fast enough to prevent more aggressive measures by the Fed,” said Tom Lee, head of research at Fundstrat.

“The most important economic report this week is the September CPI report. Inflation has proven to be difficult to forecast and given the negative ‘shock’ from the August CPI, it would be difficult for any investor to have conviction going into this report,” Lee added.

Adding to the market anxiety, and keeping any Wednesday rally in check, is the continuing turmoil in U.K. government bonds after the Bank of England reiterated it would stop supporting the market after Friday.

Investors have become increasingly concerned of late that severe stresses in the financial system may emerge as central banks switch from the era of zero or negative interest rates to sharply higher borrowing costs as they try to tackle inflation at multi-decade highs.

“[G]lobal financial conditions have tightened as central banks continue to raise interest rates. Our latest Global Financial Stability Report shows that financial stability risks have increased since our last report, with the balance of risks tilted to the downside,” said the International Monetary Fund in a report released on Tuesday.

Ian Williams, strategist at Peel Hunt, noted: “The mood of global investors was gloomy enough and hardly needed yesterday’s reminder from the IMF that the risks to financial stability have increased. Its report highlighted specifically (if obviously) the threats from persistent inflation, China’s slowdown and the war in Ukraine. The highlighted ‘disorderly repricing of risk’ is arguably already underway.”

The Fed may offer its view on the topic as a number of officials are due to give comments on Wednesday. Minneapolis Fed President Neel Kashkari is due to speak at 12 noon, while Fed vice chair Michael Barr will speak at 1:45 p.m. The minutes of the Fed’s previous monetary policy setting meeting will be released at 2 p.m. and Fed governor Michelle Bowman will deliver comments at 6.30 pm. All Eastern Time.