U.S. stock futures showed a downward trend on Monday as investors reconsidered their expectations regarding potential interest rate reductions by the Federal Reserve. Caution prevailed amidst rising geopolitical tensions, particularly in the Middle East, along with an impending release of crucial inflation data and the approach of third-quarter earning reports from major corporations.
According to the CME’s FedWatch tool, there is now an over 85% probability of a 25 basis point rate cut at the Fed’s upcoming November meeting. This marks a shift in sentiment; just last week, the market was optimistic about a more pronounced cut of 50 basis points. The recent September jobs report revealed an unexpected surge in job creation, with the economy adding the highest number of jobs in six months, which suggests that the labor market remains robust.
The Cboe Volatility Index, known as Wall Street’s fear gauge, spiked to 21.17, hitting its highest level in four weeks, reflecting growing investor anxieties. Concurrently, U.S. Treasury yields experienced an upward trend, with the yield on the benchmark 10-year notes surging past 4% for the first time in two months.
Analysts at Brown Brothers Harriman noted that both the U.S. dollar and Treasury yields are now stabilizing near multi-week highs, a response to the impressive job figures released last Friday. Analysts predict that market movements will continue to oscillate based on the underlying strength of the economy, heightened military tensions, and investor sentiment.
Key tech stocks sensitive to interest rates, such as Nvidia, Alphabet, and Microsoft, faced pressure due to the rising yields, resulting in premarket declines of 0.8%, 0.5%, and 0.3% respectively. Apple shares dipped by 1.2% after Jefferies initiated coverage on the stock, assigning it a “hold” rating.
On a more optimistic note, Pfizer’s shares climbed by 3.3% following reports that activist investor Starboard Value acquired a stake of approximately $1 billion in the pharmaceutical company.
As of 7 a.m. ET, futures for the S&P 500 E-minis had declined by 30.75 points (0.53%), while the Nasdaq 100 E-minis were down by 136.5 points (0.67%), and the Dow E-minis fell by 193 points (0.46%). The small-cap Russell 2000 index also experienced a drop of 0.68%.
While investors digest the potential future of interest rate cuts, there remains a predominant sense of optimism regarding the overall strength of the economy and equity markets. Goldman Sachs recently raised its year-end target for the S&P 500 to 6,000, up from 5,600, while also reducing the probability of a U.S. recession to 15% from 20%.
Additionally, escalating tensions in the Middle East have kept investors on alert; recent reports indicated that Hezbollah rockets struck Haifa, Israel’s third-largest city, marking a significant escalation in conflict.
This week, the focus will shift to the consumer price index, set to be released on Thursday, alongside expected comments from several Federal Reserve officials, including Michelle Bowman and Neel Kashkari, on Monday. Furthermore, the earnings season kicks off with major banks such as JP Morgan Chase, Wells Fargo, and BlackRock slated to announce their earnings on October 11.
As the S&P 500 has rallied nearly 20% this year and is hovering near record heights, the earnings reports will serve as a critical examination of this ongoing equity rally.