6.30am: Markets betting on 25 bps rate hike
Wall Street is expected to end the month on the back foot as investors take some profits following January’s strong run and await the outcome of the US Federal Reserve’s first interest rate decision of 2023, due on Wednesday.
Futures for the Dow Jones Industrial Average (DJIA) fell 0.4% in Tuesday pre-market trading, while those for the broader S&P 500 index dropped 0.5%, and contracts for the Nasdaq-100 shed 0.6%.
The major US indexes all finished in the red on Monday, with corporate earnings reports also weighing on the market as well as the rate hike worries. At the close, the DJIA was down 0.8% at 33,717, the S&P 500 dropped 1.3% to 4,018 and the Nasdaq Composite lost 2% to 11,394, which was its biggest daily fall so far for 2023.
Investors are starting to “show some fear” as the Federal Open Market Committee (FOMC) starts its two-day rate-setting meeting today, commented Neil Wilson, chief market analyst at Markets.com.
“There is genuine doubt among bulls here – they know the Fed can drive a horse and coaches through their recovery by pushing back strongly against the loosening in financial conditions we have seen in recent weeks,” he added. “Stocks have had a good run higher this year so some profit-taking ahead of the uncertainty of the Fed makes sense too.”
Wilson noted that the market is currently pricing in a 98.6% chance the FOMC votes to raise rates by 25 basis points, and a roughly 85% chance for one last hike in March. This setup creates ample opportunity for a hawkish surprise from the Fed – including how high rates will peak and how long they will stay there, he said.
Companies reporting quarterly earnings today include ExxonMobil, Samsung, Pfizer, McDonald’s and Caterpillar, among others.