US stock futures tried to recover after three straight days of losses. Investors cautiously returned to the stock market ahead of fresh US inflation data due later Thursday.
Dow and S&P 500 futures were higher in early trading. At 5:09 am ET, Dow E-minis were up 108 points, or 0.21%, while S&P 500 E-minis gained 9.75 points, or 0.13%. Nasdaq futures moved in the opposite direction. Nasdaq 100 E-minis were down 26.25 points, or 0.09%, at the same time.
Oil prices above $100 are adding pressure to the stock market. The conflict in the Middle East has pushed oil prices above $100 a barrel for the first time since July, raising concerns about inflation and interest rates, according to Reuters.
Higher oil prices could make inflation harder to control. More expensive crude can increase costs for businesses and consumers, adding to concerns that inflation could remain high.
Investors are now waiting for the US Producer Price Index (PPI). The PPI report, due later Thursday, will give investors fresh clues about where the Federal Reserve could take interest rates. PPI measures changes in prices faced by producers. If the report shows that input costs are rising faster, investors could become more worried that inflation pressures are spreading.
The Consumer Price Index (CPI) will be even more important. The CPI report is due on Friday and usually gets more attention from investors than the PPI report. The inflation data could influence expectations for the Fed's next rate move. Traders are watching the reports closely because stronger inflation could increase pressure for higher interest rates.
{{/usCountry}}The Consumer Price Index (CPI) will be even more important. The CPI report is due on Friday and usually gets more attention from investors than the PPI report. The inflation data could influence expectations for the Fed's next rate move. Traders are watching the reports closely because stronger inflation could increase pressure for higher interest rates.
{{/usCountry}}Markets are already pricing in a higher chance of a rate hike this month. Traders see a 62.2% probability of a rate hike, according to the CME FedWatch tool. Higher interest rates could create more volatility for stocks. When borrowing costs rise, investors can become more cautious about buying equities.
Also read: Mortgage rates forecast: Could rates hit 7% again by 2027 amid high inflation?
Strong economic growth could help stocks handle higher rates. Jeff Buchbinder, chief equity strategist at LPL Financial, said strong economic fundamentals can offset some of the pressure from higher interest rates.
Buchbinder said stocks can still rise when rates are high if the economy remains healthy. He said markets have historically been able to move higher in a rising-rate environment when economic growth remains intact and recession risks stay contained, according to Reuters.
High Treasury yields add pressure
US Treasury yields are another major concern for stocks. Higher yields make government bonds more attractive compared with equities because Treasuries are considered relatively low-risk investments. The 10-year US Treasury yield has climbed sharply. It stood at 4.8508%, its highest level since 2023.
The Treasury Department is trying to keep longer-term yields under control. On Wednesday, it said it would buy up to $6 billion in longer-dated Treasury bonds as part of a buyback programme. The Treasury buyback has so far had limited impact on long-term yields. ING strategists said markets may be signalling to Treasury Secretary Scott Bessent that controlling long-term rates could be difficult.
Higher Treasury yields can make stocks less attractive. Investors may prefer the relatively safer returns from government bonds when yields rise, reducing demand for equities. Capital.com analyst Kyle Rodda said the rise in yields shows the short-term impact of Treasury buybacks may be limited. He said a sustained fall in long-term yields would likely require bigger changes in economic policy.
Also read: Will Bessent’s Treasury bond buyback shake markets? Investors await $4 billion-plus move
Long-term yields could fall if the US government reduces spending or the Fed raises rates. Rodda said genuine changes in macroeconomic policy would be needed for a lasting decline in long-term Treasury yields.
Oil remains a major market risk
Brent crude prices rose further after breaking above $100. Brent futures gained 0.81% and settled near $102 a barrel. Brent had crossed $100 on Wednesday for the first time in more than six weeks. The rise has increased fears about possible supply disruptions linked to the Middle East conflict.
Rising oil prices could keep pressure on inflation and interest rates. This creates another challenge for investors who are already dealing with high Treasury yields and uncertainty around the Fed, according to Reuters.
Stocks to watch
American Eagle Outfitters shares fell sharply before the market opened. The retailer's stock dropped 11.37% premarket after it kept its annual comparable-sales forecast unchanged. American Eagle also warned about its current-quarter gross margin. The company said its gross margin could remain unchanged from a year earlier.
Apple shares moved higher after its latest product launch. Apple gained 1.19%, a day after launching Duo, a $1,999 folding iPhone. Meta shares also gained. Meta was up 0.74% after recording its strongest trading day in more than two months.
The market is therefore facing several competing forces. Stocks are attempting to recover, but rising oil prices, high Treasury yields and uncertainty around inflation and Fed policy continue to weigh on investor sentiment.
The key focus now is the inflation data. The PPI report on Thursday and CPI report on Friday could give investors a clearer picture of whether inflation is cooling or whether higher prices could keep interest rates elevated.