Hawkish FOMC minutes suggest caution in the rally on index futures

Hawkish FOMC minutes suggest caution in the rally on index futures

The rally in US index futures has been remarkable, given the backdrop of a sharp rise in Treasury yields. The hawkish hold in the June FOMC meeting has been reinforced by the hawkish bias of the meeting minutes. This is driving Treasury yields higher and raising concerns about the durability of the rally in US index futures.

• Hawkish FOMC minutes drive greater certainty of further rate hikes.

• Rising Treasury yields are beginning to weigh on index futures.

• Negative divergences in technical indicators point to potential corrections.

The hawkish minutes mean hikes are more likely

The FOMC remains hawkish despite pausing rate hikes in June. Meeting minutes highlighted that “almost all participants” expected further rate increases in 2023, depending on data. FedWatch data shows an 89% probability of a July hike, with subsequent rate increases being priced into September and November expectations.

Higher rates and higher yields

Expectations of further rate hikes are driving Treasury yields higher. The 10-year yield is approaching 4.00%, nearing its March high of 4.09%. Rising nominal yields have also pulled real bond yields higher, with the US 10-year TIPS yield at levels last seen in October/November. Interestingly, this rise in yields has coincided with a rally in US index futures, which is atypical.

Key observations:

• A mild divergence between Treasury yields and index futures suggests waning correlation.

• Firming rate hike expectations might now be pressuring index futures.

Technicals show bearish divergences are emerging

Negative divergences in momentum indicators signal waning upside potential in index futures.

• S&P 500 futures: A higher high at 4498 was accompanied by a lower peak in the RSI above 70, creating a classic negative divergence. A fall in RSI below 60 would confirm a failure swing, increasing the importance of the 4368 support level.

• NASDAQ 100 futures: A higher high at 15432 was matched with a lower RSI high, signaling a viable negative divergence. The key support level to watch is 14853.

While divergences are early warning signals of a potential correction, markets may still push for higher highs before corrections take hold. Signs of a pullback are growing, but timing remains uncertain.

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