U.S. stock futures stall as traders absorb Fed’s ‘hawkish pause’ in interest rate rises

What’s driving markets

The Federal Reserve may have stalled the U.S. stock market rally, for now at least.

Increases in 2-year Treasury yields
TMUBMUSD02Y,
4.684%
to three-month highs on Thursday, indicate that investors are absorbing the prospect of the central bank raising interest rates again in coming months, after standing pat at 5% to 5.25% this week.

The S&P 500 has jumped 13.9% so far in 2023, partly on hopes the Fed’s campaign of sharp hikes in borrowing costs over the past year or so would soon end. So, Wednesday’s news that most of the Fed governors see rates hitting 5.6% by the end of this year may be disappointing for bulls.

“The suggestion of another rise in addition to July took some wind from investors’ sails…The overall conclusion that the fight against inflation remains live will likely rekindle concerns over the possibility of recession should the Fed overtighten, with the central bank very much keeping its options open,” said Richard Hunter, head of markets at Interactive Investor.

A batch of data Thursday will provide some fresh perspective on the health of the U.S. economy. The weekly initial jobless claims report will be published at 8:30 a.m., alongside May retail sales and import prices, and the June Empire State and Philadelphia Fed manufacturing surveys. Industrial production and capacity utilization numbers for May will be released at 9:15 a.m., all times Eastern.

Further damping sentiment on Thursday is news from China, where retail sales and industrial production data showed the world’s second biggest economy continues to struggle in sustaining its post-COVID lockdown rebound.

The People’s Bank of China reacted by cutting its key policy rate for first time in nearly a year, but assets sensitive to perceptions of China demand, such as oil
CL.1,
+0.67%
and copper
HG00,
+0.03%,
are still under pressure early Thursday.

And traders will have to contend with more monetary policy action when the European Central Bank is expected at at 2:15 p.m. Central European time (8:15 a.m. Eastern) to increase its key rate by a quarter-point, taking rates to 3.5%.

ECB President Christine Lagarde will start a press conference half an hour later and the market will be keen to see if she continues to warn of more tightening ahead.

Companies in focus

• Lennar Corp. shares
  LEN,
  -1.09%
  rose in premarket trade after the homebuilder reported results that topped Wall Street expectations, and hiked its delivery forecast for the year.

• Shares of leading AI plays including Nvidia
  NVDA,
  +4.81%,
  Advanced Micro Devices
  AMD,
  +2.25%
  and C3.ai
  AI,
  -0.63%
  slipped after strong gains.