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Why are stock futures rising before US Fed rate decision? S&P 500, Nasdaq, Dow react as 10-year yield hits 5%
US stock futures rise before the US Fed rate decision as S&P 500, Nasdaq and Dow futures gain, while the 10-year Treasury yield reaches 5%.
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US stock futures moved higher on Wednesday as investors waited for the Federal Reserve’s interest-rate decision. The market is expecting the US Fed rate to raise interests, which would be its first rate hike in more than three years.
The S&P 500 futures rose 0.2% before the decision. Dow Jones Industrial Average futures gained 0.1%, while Nasdaq futures climbed 0.4%. The moves show that investors were cautiously positive ahead of the Fed announcement. The expected rate hike is mainly linked to still-high inflation in the US. Inflation remains above the Fed’s 2% target, making it harder for the central bank to ease borrowing costs, according to AP.
Fed rate decision and inflation
Fed Chair Kevin Warsh had already warned about inflation in a major speech last month. Economists quoted by AP said his comments increased expectations of a rate hike because he said inflation is still too high. New US inflation data released last week also added to expectations of higher interest rates.
Higher interest rates make loans more expensive for people and businesses. This can reduce spending and help bring inflation down.
The expected rate increase has put Warsh at odds with President Donald Trump. Trump has been pushing for lower interest rates and had previously criticised former Fed Chair Jerome Powell over the issue. The 10-year US Treasury yield is another major focus for investors. The yield was around 5% on Wednesday, after briefly touching 5.04% earlier this week, its highest level in years.
10-year Treasury yield hits 5%
Higher Treasury yields have been putting pressure on US stocks. When government bond yields rise, bonds can become more attractive compared with stocks, while higher borrowing costs can also weigh on companies and consumers. The rise in Treasury yields is also linked to stronger inflation concerns and the growing US national debt. The energy crisis caused by the Iran war has added to inflation pressure, while US government debt has continued to grow.
Oil prices fall today
Oil prices fell on Wednesday, giving markets some relief after rising earlier in the week. Brent crude, the global benchmark, dropped 1.1% to $107.61 a barrel, while US benchmark crude fell 2% to $103.70 a barrel. Even after Wednesday’s decline, oil prices remain much higher than before the recent Middle East conflict.
Brent was around $70 a barrel before the US and Israel attacked Iran in late February, according to AP. Supply risks are still high because of disruptions involving Saudi Arabia, Yemen and Iran. Saudi Arabia’s closure of a key oil pipeline has added pressure to global oil supplies.
Middle East oil supply risks
Iran-backed Houthi rebels in Yemen have also been targeting infrastructure in Saudi Arabia and shipping in the Red Sea. The group has seized several islands around the Bab el-Mandeb Strait. Iran is also continuing to target ships around the Strait of Hormuz. The waterway is a major route for global oil shipments, so disruptions there can keep energy prices under pressure.
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US gas and diesel prices
Higher oil prices are already showing up at US gas stations. The average US gasoline price rose to $4.37 a gallon, up from $4.22 a week earlier, according to motor club AAA. Diesel prices are also climbing. The average US diesel price reached $6.31 a gallon, compared with $5.94 a week earlier, after crossing $6 a gallon on Friday.
US retail sales data
Investors are also waiting for fresh US retail sales data. The Commerce Department is due to release August retail sales figures, giving markets a fresh look at how strongly American consumers are spending. US consumers unexpectedly reduced spending in July.
Retail sales fell 0.6%, marking the biggest monthly decline in more than a year. Economists expect consumer spending to recover in August. Analysts surveyed by FactSet expect retail sales to rise 0.9% for the month.
Global markets today
Markets outside the US were also mostly higher. In Europe, Britain’s FTSE 100 rose 0.6% to 10,723.77, France’s CAC 40 gained 0.4% to 8,123.78, and Germany’s DAX increased 0.3% to 25,466.60. Asian markets also moved higher.
The US dollar strengthened slightly against the Japanese yen. The dollar rose to 155.19 yen from 155.10 yen. The euro weakened slightly against the dollar. It was trading at $1.1535, compared with $1.1544 previously.
Overall, US stock futures were higher ahead of the Fed decision despite several pressures on markets. Investors were balancing expectations for higher interest rates against falling oil prices and hopes for a rebound in US consumer spending. The 10-year Treasury yield at around 5% remains a key pressure point for stocks. At the same time, investors are watching the Fed’s rate decision and its comments for clues about what could happen to interest rates, inflation and financial markets next.
