US stocks seen opening slightly higher in cautious trading ahead of rate verdict

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6.30am: Treading water

US stocks are expected to open modestly higher on Wednesday ahead of the latest Federal Reserve interest rate verdict, due at 2.00pm ET, which is expected to confirm widely held expectations of a 75 basis point (bp) rate hike.

Futures for the Dow Jones Industrial Average were up 0.3% in pre-market trading, while those for the S&P 500 gained 0.2%, and contracts for the Nasdaq-100 were 0.1% higher.

While investors widely expect a 75 basis point interest rate hike, there is still some residual fears of a bigger 100 basis point increase and that is likely to keep trading cautious.

“Activity on Fed funds futures still assesses less than 20% probability for a 100-basis point hike from the Fed today. And more importantly, the FOMC doesn’t have a modern history of making abrupt moves,” noted Ipek Ozkardeskaya, senior analyst at Swissquote bank.

Given the expectation that the Fed will deliver a 75bp hike today, confirmation of those expectations may well trigger a relief rally in both equities and bonds, she said.

Still, appetite for risk is poor ahead of the rate verdict, especially after Sweden’s central bank delivered a surprise 100 basis point rate increase yesterday, its most aggressive move in three decades, Ozkardeskaya noted.

US rate-setters have the tough task of having to dampen inflation which remains stubbornly around four-decade highs while also achieving a so-called soft landing for the wider economy. Investors fear that aggressive interest rate increases against the background of elevated inflation will push the world’s largest economy into a prolonged recession.

A 75-basis point hike today will mark the third such move in as many meetings and it remains to be seen if the rate increases are having their desired effect in taming inflation.

The outlook for share prices will also depend on the Federal Reserve’s statement accompanying its rate decision and the news conference after the event. Any sign of continued hawkishness will weigh on equities. Conversely, any indication that price pressures are responding to the hefty recent rate hikes will bring out bargain hunters.

“We certainly have a couple of tense hours before the Fed decision falls,” said Ozkardeskaya.

Contact the author at jon.hopkins@proactiveinvestors.com

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