Futures Dip, Bonds Fall as Clock Ticks to Powell: Markets Wrap

(Bloomberg) — US equity futures slipped Friday and Treasuries retreated as a chorus of Federal Reserve hawks prepared the ground for a much-anticipated speech by Chair Jerome Powell that’s set to shape views on the pace of monetary tightening.

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S&P 500 and Nasdaq 100 contracts were in the red after Wall Street’s rally on Thursday. The 10-year Treasury yield climbed about five basis points to 3.08%. The dollar was steady. In addition to Powell’s speech later on Friday, traders have to keep an eye on a raft of US data, including personal spending and the Fed’s preferred measure of inflation, both of which are expected to show price pressures cooling.

Stocks in Europe reversed gains to set the benchmark Stoxx Europe 600 index on track for a second weekly drop, with media and travel the biggest decliners. Miners climbed as prices of iron ore, copper and other industrial metals rallied after China’s latest effort to stimulate its flagging economy. European sovereign bonds declined.

Powell may restate the Fed’s resolve to keep hiking interest rates to fight high inflation when he speaks at 10 a.m. Washington time Friday in Jackson Hole, Wyoming. Fed officials gathering for the conference are already singing from a hawkish script, pushing back on expectations of tempered tightening.

A rebound in stocks and bonds from June lows has left financial conditions at easier levels than before the Fed began its aggressive tightening campaign. The question is whether Powell will try to reset market expectations to ensure that the brakes continue to be applied to economic activity.

Powell will likely “endorse the re-tightening of financial market conditions and thus also the trend towards higher market rates of late, given that the Fed still is a stretch away from getting inflation under control,” said Benjamin Schroeder, senior rates strategist at ING Groep NV. “Our economists see the risk of the core inflation reading still heading higher.”

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US central bankers at Jackson Hole stressed the need to keep raising rates. Kansas City Fed President Esther George said that a peak higher than 4% can’t be ruled out. The bond market remains divided on whether the Fed will hike by 50 basis points or 75 basis points in September.

The latest US growth data pointed in different directions in the first half of 2022, adding to the ongoing debate on the health of the economy. Europe’s outlook is darkening due to a continuing surge in energy prices.

Brent crude oil scaled $100 a barrel, gold wavered and Bitcoin slipped toward $21,000. MSCI Inc.’s Asia-Pacific equity gauge edged up to a one-week high. Apparent progress on averting the delisting of Chinese shares in the US over an audit dispute helped sentiment.

What to watch this week:

• Fed Chair Powell speaks at Jackson Hole, Friday

• US personal income, PCE deflator, University of Michigan consumer sentiment, Friday

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Some of the main moves in markets:

Stocks

• The Stoxx Europe 600 fell 0.2% as of 10:38 a.m. London time

• Futures on the S&P 500 fell 0.3%

• Futures on the Nasdaq 100 fell 0.5%

• Futures on the Dow Jones Industrial Average fell 0.2%

• The MSCI Asia Pacific Index rose 0.4%

• The MSCI Emerging Markets Index rose 0.3%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro rose 0.3% to $1.0005

• The Japanese yen fell 0.3% to 136.85 per dollar

• The offshore yuan fell 0.2% to 6.8680 per dollar

• The British pound was little changed at $1.1835

Bonds

• The yield on 10-year Treasuries advanced five basis points to 3.08%

• Germany’s 10-year yield advanced three basis points to 1.35%

• Britain’s 10-year yield was little changed at 2.62%

Commodities

• Brent crude rose 1.2% to $100.49 a barrel

• Spot gold fell 0.4% to $1,751.31 an ounce

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