US stock futures erase advances as bank earnings loom

BLOOMBERG

US equity futures struggled for direction as investors braced for inflation data and corporate results that could confirm fears about the health of the financial system.
Contracts on the tech-heavy Nasdaq 100 flipped to a loss while those on the S&P 500 gave up early gains to trade flat. The yield on policy-sensitive two-year Treasuries slipped below 4%, backtracking some of its climb as traders positioned for another interest-rate hike.
Cracks in 2023’s equity advance are appearing, as hedge funds and other speculators amass the deepest short position since November 2011 when the US sovereign credit rating was cut. Widely-watched inflation data is due on Wednesday and banks on Friday kick off what’s forecast to be the worst earnings season since the depths of the pandemic crisis.
“It remains a very tricky trading environment,” Chris Turner, a strategist at ING Bank wrote in a note to clients. “Experienced commentators are refusing to dismiss March events as a one-off and instead prefer to see bank failures as a harbinger of forthcoming stress in the global financial system.”
The Federal Reserve appears on track to keep raising rates despite recent bank strains, with resilient labour markets and higher oil prices holding sway for policymakers focused on their price-stability mandate.
Markets are pricing for a strong likelihood the Fed will raise borrowing by a quarter-point on May 3 to contain inflation, after US payrolls rose at a firm pace last month and the unemployment rate dropped. The report on consumer prices, expected to show a 0.4% monthly increase in the core consumer price index, could cement the Fed’s rate path.
A scenario where the Fed halts rate hikes in May, which markets had briefly entertained last month as fragility in banks raised recession fears, looks increasingly remote.
“The Fed has maintained its resolute inflation narrative despite banking sector stress, switching to liquidity tools to tackle the funding squeeze, and keeping its monetary policy toolkit intact,” Mizuho International Plc strategists including Evelyne Gomez-Liechti wrote in a note.
After May, though, markets are pricing in a pivot to easier policy. Tighter financial conditions following the failure of Silicon Valley Bank could pave the way. Investors predict rates will peak below 5%, with the Fed then cutting by roughly 50 basis points before end 2023. Oil extended loss, with West Texas Intermediate dipping back below $80 a barrel.