Dow Jones, S&P 500, Nasdaq expected to start lower ahead of Fed rate news; ADP data weak

9.35am: Sluggish trading ahead of Fed’s decision

US stocks have dipped into the red at the open ahead of the Federal Reserve’s highly-anticipated interest rate hike decision due this afternoon.

Just after the market opened, the Dow Jones Industrial Average was down 214 points or 0.6% at 33,872 points, the S&P 500 dipped 13 points or 0.3% at 4,064 points, and the Nasdaq Composite was down 20 points or 0.2% at 11,564 points.

Major movers included Snap Inc, which fell more than 13% at the open on yet another round of disappointing quarterly earnings and forecast revenue declines for 1Q 2023, while Peloton Interactive Inc added 7.2% on better-than-expected results which showed the strength of its subscriptions revenue stream.

Meanwhile, US private payrolls increased less than expected in January according to the ADP National Employment report. However, the labor market may remain stronger than this data indicates with ADP chief economist Nela Richardson noting the impact of weather-related disruptions on employment during the reference week used to compile the report.

“Hiring was stronger during other weeks of the month, in line with the strength we saw late last year,” Richardson said.

9.15am: Private payrolls weak

Ahead of today’s Federal Reserve interest rate decision, and a precursor for Friday’s January non-farm payrolls report, the latest ADP report showed a 106,000 increase in US private payrolls in January, well below the consensus for 180,000.

In a quick reaction, economists at Pantheon Macro noted: “This is only the sixth iteration of the new ADP methodology, so we have no way of knowing if its apparent tendency to undershoot the official initial private payroll reading is structural or just noise. For the record, the median difference between ADP and the official number in the past five months is -39K.

“That appears to suggest a private payroll number of about 150K on Friday, but the range of ADP errors has been huge, from -176K in August to +15K in December. In short, we have nothing like enough history to evaluate the usefulness of ADP. We’re sticking to our 175K forecast for the official headline number, but we also expect job growth to slow to 100K or less by the end of the quarter, and to be close to zero in Q2.”

With less than a quarter of an hour to the US open, futures for all three major US stock indexes remained lower as investors stayed on the sidelines ahead of the FOMC meeting decision announcement.

6.30am: Investors looking to Jerome Powell for clues

Wall Street is expected to open lower as February trading gets underway, with investors anticipating the outcome of the US Federal Reserve’s first interest rate decision of the year and look to a raft of quarterly earnings reports from large tech companies. 

Futures for the Dow Jones Industrial Average (DJIA) fell 0.4% in Wednesday pre-market trading, while those for the broader S&P 500 index also shed 0.4%, and contracts for the Nasdaq-100 declined 0.3%.

The Federal Open Market Committee wraps up its two-day rate-setting meeting today with a 25 basis point (bps) hike expected, to be followed by a press conference with Fed Chair Jerome Powell that will be watched closely for clues on the future path for interest rates. 

Ahead of that, the major US indexes ended higher on Tuesday, with the DJIA closing up 1.1% at 34,086, the Nasdaq Composite adding 1.7% to 11,585, and the S&P 500 gaining 1.5% to 4,077. That took January’s gains for the Nasdaq to 10.7%, while the S&P rallied 6.2% and the Dow added 2.8%.

“After a very positive January, the start of February today marks a pivotal three days for markets that have the potential to decisively set the tone for the weeks ahead,” Deutsche Bank strategist Jim Reid commented in a morning note to clients.

“We have the Fed’s latest policy decision and Chair Powell’s press conference tonight. Then tomorrow we’ve got more policy decisions from the ECB and the BoE, an array of major earnings including Apple, Amazon and Alphabet, followed up by the US jobs report for January on Friday,” he added.

When it comes to the Fed’s decision, while a 25 bps rate hike is now widely expected by both markets and economists, anything other than that would be a massive shock, Reid noted. 

“It would also mark the first ‘normal’ sized hike since March 2022 when this hiking cycle began, before they embarked on a series of supersized hikes to swiftly get the policy rate into restrictive territory,” he said. “Given that the 25bps move is anticipated, the main focus today will instead be on any changes to forward guidance, both in the statement and from Fed Chair Powell’s press conference.”

Meanwhile, companies reporting quarterly earnings today include Facebook, Alibaba, Novartis, Accenture, and T-Mobile. Thursday sees Apple, Amazon and Alphabet releasing their latest financial statements.