Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 3, 2022.
Brendan Mcdermid | Reuters
Stock futures were largely flat in overnight trading as investors braced for the Federal Reserve’s big interest rate decision on Wednesday, where the central bank is widely expected to hike rates by half a percentage point.
Futures on the Dow Jones Industrial Average were flat. S&P 500 futures inched marginally higher, and Nasdaq 100 futures rose 0.2%.
Markets are preparing for a hawkish Fed, and the central bank is also expected to announce a plan to cut its roughly $9 trillion balance sheet by $95 billion a month, beginning in June.
Respondents to the May CNBC Fed Survey indicated they expect the central bank to announce the long-anticipated 50 basis point hike on Wednesday, followed by a second one in June as it looks to cut its balance sheet. The majority of respondents also expect a recession at the end of the tightening cycle, the survey found.
“We’re at a place right now where the market’s pricing in that inflation is going to be back near pre-pandemic levels within two years with only modest Fed tightening,” said Rebecca Patterson, Bridgewater’s chief investment strategist, on CNBC’s “Closing Bell” on Tuesday. “We think that either the Fed is going to have to tighten more than expected to get inflation to their target or inflation is going to be higher than expected.
Meanwhile, Lyft plummeted 25% in extended trading on Tuesday after the ridesharing company shared weak guidance for the current quarter as it expects to invest in driver supply. Airbnb rose 3.6% as the company expects a continued travel rebound, and Starbucks added 2.4% after topping revenue estimates.
In Tuesday’s regular trading session the Dow Jones Industrial Average added 0.20%, and the S&P 500 gained 0.48%. The tech-heavy Nasdaq Composite rose 0.22%.
The moves came as the markets attempt to recover from a brutal tech-led April sell-off that saw the Nasdaq hit its worst month since 2008. The Dow and S&P 500 also finished their worst month since March 2020.
“If our ‘no recessions soon’ call is right, then the pattern we have seen so far this year will probably continue: with equities punching lower and then recovering at least partially as long as recession fails to materialize, and the rates and commodity curves continuing to move higher over time,” wrote Jan Hatzius, Goldman Sachs’ chief economist on Tuesday.
The S&P 500 is currently trading in correction territory, down about 12.4% year to date. LPL Financial’s Ryan Detrick pointed out Tuesday the current correction parallels the size and length of previous corrections after World War II.
Along with the Fed decision, investors are looking ahead to earnings from CVS Health, Uber and Yum Brands on Wednesday.