Caution takes hold of US futures as the Fed’s Powell leaves everyone guessing

Markets have taken on an edge of caution in recent sessions. The Fed’s “hawkish hold” last week suggested that it could still be on course to further increase rates in the coming months. Jerome Powell’s Congressional testimony has done little to provide clarity. The wind has been knocked out of the sails of the impressive rally on US index futures, at least for the time being.

• Powell continues to talk up potential further rate hikes

• The FOMC is certainly divided on resuming rate tightening

• Although markets continue to question further hikes, US index futures are unwinding towards support

Rinse and Repeat from Powell

The FOMC meeting last week showed that the Fed was on hold but could yet be in line to hike a couple more times this year. This line of a hawkish hold was reiterated by Fed Chair Powell at the first of his two Congressional testimonies.

Speaking before the House Financial Services Committee, Powell was asked about further tightening and emphasized that it was not a “pause” in hikes. With the dots suggesting two more hikes this year, Powell described this projection as:

“a pretty good guess of what might happen if the economy performs about as expected.”

This essentially mirrored the FOMC’s messaging from the previous week. Inflation remains a concern, and economic growth continues at a tepid pace. The market’s reaction has been tepid, with little divergence from the uncertainty following the FOMC meeting.

Is the Hold Going to Be a Continuing Pause?

The next FOMC meeting is five weeks away, providing ample time for economic data to influence decisions and for Fed members to shape the narrative. Although Powell denies it, the Fed’s decision was effectively a “pause,” creating uncertainty over the next steps. Are more hikes forthcoming, or has the Fed already peaked?

While Powell maintains the official line, other FOMC members are urging caution. For instance:

• Austan Goolsbee (voter in 2023, the most dovish member) emphasized the Fed is in “wait-and-see” mode.

• Raphael Bostic (non-voter in 2023, slightly hawkish) warned against hiking too soon, which could “needlessly drain” economic activity.

Bostic’s perspective, coming from a more moderate stance, may offer insight into the committee’s broader consensus.

A Cautious Market Could Continue

Positive sentiment has retreated slightly, with caution dominating. This is evident in bond markets, which have seen stalling momentum, and equity pullbacks.

US interest rate futures are struggling to price in even one more hike, while expectations for the first rate cut have been pushed into Q1 2024. This cautious stance is reflected in the CME Group FedWatch tool, which currently prices a 72% probability of a 25bps hike in July.

The US 2-year Treasury yield remains in a holding pattern, consolidating under 4.8% with an intact uptrend but no clear direction. Limited high-impact economic data over the next week could leave market movement tied to Fed commentary.

Equity Futures Under Pressure

Equity futures have seen corrections following impressive rallies. The e-mini NASDAQ 100 futures and e-mini S&P 500 futures are pulling back, with a tech sector sell-off contributing significantly to the move. For instance, Tesla shares fell by -5.5%, and declining NASDAQ stocks outpaced advancing stocks by 1.4 to 1.

Notably, traded volume on US markets during this correction has been around -7% below the 20-day average, suggesting a lack of conviction behind the move lower. This could indicate that the correction may be limited.

Chart Outlook

The e-mini NASDAQ 100 futures, which have been in overbought RSI conditions for weeks, are seeing a natural pullback. Initial support lies around 14695/14795, while a move below 14248 would suggest a deeper correction within the uptrend.

For now, the pullback is seen as a healthy development and could present a buying opportunity within the broader upward trend.

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