Stocks look set to rebound firmly from their worst week in more than two years, but traders remain worried about near-term recession risk and are closely-eying moves in Treasury bond yields.
U.S. equity futures rebounded firmly Tuesday, following on from the worst week on Wall Street in more than two years, as investors eased back into risk markets despite persistent concerns over growth and inflation and fears of a near-term recession.
The U.S. dollar index, which tracks the greenback against a basket of six global currency peers and often acts as a proxy for risk appetite, fell 0.4% in overnight trading to 104.309 as markets in Asia and Europe built modest gains — the latter bouncing from the lowest levels in a year last week — even as many of the same macro concerns continue to accumulate.
The dollar was also pressured by comments from the European Central Bank’s chief economist Philip Lane, who signaled support for a 25 basis point rate hike in Frankfurt next month, but left open the possibility of a bigger move in September as policymakers grapple with the fastest inflation on record in the single-currency area.
Rate bets are also accelerating in the U.S., which inflation is running at a forty year high of 8.6%, with the CME Group’s FedWatch tool indicating a 98.1% chance of a 75 basis point hike in late July, and a 37.3% chance of a similar move in September.
The Fed’s aggressive inflation fight could tip the U.S. economy into recession — a view that is hotly denied by President Joe Biden — as demand is snuff-out by higher interest rates and borrowing costs.
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Goldman Sachs’ chief economist, Jan Hatzius, said the chances of a U.S. recession over the next year has risen from around 15% prior to the Fed’s recent rate hike to around 30%, noting that as a result of the central bank’s inflation fight, “terminal rate expectations have risen, and financial conditions have tightened further and now imply a substantially larger drag on growth — somewhat more than we think is necessary,”
That likely puts corporate earnings in focus as one of the last key growth drivers to keep the U.S. from a broad-based downturn heading into the final weeks of the second quarter.
Data from Refinitiv suggests June quarter earnings growth will slow to 5.6%, taking collective S&P 500 profits to around $464.7 billion, powered almost exclusively by the energy sector.
With economists focused on the prospects for U.S. growth, and debating the chances of a near-term recession, investors will likely focus on both the job and housing market this week as growth metrics slow and interest rates surge.
Higher U.S. mortgage rates, which surged the most in 35 years last week following the Fed’s 75 basis point rate hike, are expected to have clipped existing home sales when the Commerce Department publishes data on Tuesday, The Mortgage Bankers Association will follow with borrowing data on Wednesday after Freddie Mac, the biggest individual mortgage loan buyer in the country, said 30-year fixed mortgage rates surged to 5.78% last week, the biggest increase since 1987.
Heading into the start of the holiday-shortened week on Wall Street, Europe’s region-wide Stoxx 600 was marked 0.76% higher in early Frankfurt trading, following on from a 1.43% advance for Asia’s MSCI ex-Japan index.
Benchmark 10-year Treasury bond yields dipped to 3.288% in overnight trading while 2-year notes were pegged at 3.222%.
Futures tied to the Dow Jones Industrial Average, which closed below the 30,000 point level for the only the second time since January of last year, are indicating a 470 point opening bell gain while those linked the S&P 500, which is down 22.9% for the year, are priced for a 62 point gain.
Futures linked to the tech-focused Nasdaq are looking at 190 point opening bell gain.
Kellogg (K) – Get Kellogg Company Report shares surged 8.1% in pre-market trading after the venerable packaged food group said it will split into three separate companies.
The iconic cereal brand will spin-off its snacks business, which represents around 80% of its overall sales, into a stand-alone public company focused on business divisions such as frozen breakfast, noodles and snack foods with a new global headquarters to be based in Chicago. Two other divisions, focused on cereals and plant-based foods, will remain in Battle Creek, Michigan.
Twitter (TWTR) – Get Twitter Inc. Report shares were also active, rising 1.3% after its board of directors is recommending that shareholders vote in favor a merger agreement that would see Tesla (TSLA) – Get Tesla Inc. Report CEO Elon Musk purchasing the micro-blogging website for around $44 billion.
The recommendation comes ahead of a likely early August vote on the deal, which would see Musk, by some measures the world’s richest man, purchase Twitter at $54.20 per share and then take it private.
Spirit Airlines (SAVE) – Get Spirit Airlines Inc. Report shares, meanwhile, surged 11.75% after JetBlue (JBLU) – Get JetBlue Airways Corporation Report improved its takeover bid for the low-cost carrier to around $3.65 billion as it looks to elbow-out an agreed merger with Frontier Group Holdings (ULCC) – Get Frontier Group Holdings Inc. Report.
