U.S. stock futures drift higher as traders await Fed decision and Powell’s comments

What’s driving markets

U.S. markets were subdued early Wednesday — with equity-index futures, benchmark Treasury yields
BX:TMUBMUSD10Y
and the dollar index
DXY,
all little changed — as traders hunkered down ahead of the Federal Open Market Committee’s policy decision, due at 2 p.m. Eastern.

See: The Fed will decide to cut rates when? Here are 5 Wall Street predictions through 2024.

The S&P 500 index has rallied 17.3% this year partly on hopes the Fed’s monetary tightening cycle will soon come to an end without having damaged the economy too badly.

“Investors are naturally apprehensive that Wednesday’s FOMC press conference could unleash a push higher in interest rates, and a commensurate sell-off in stocks,” said Tom Lee, head of research at Fundstrat Global Advisors.

Traders were pricing in a 99% chance that the Federal Reserve will keep rates unchanged at a range of 5.25%-5.50% later today, according to the CME FedWatch Tool. Meanwhile, the chance of a 25-basis-point rate hike to a range of 5.50%-5.75% at the subsequent meeting in November is priced at 29%. 

Some recent stronger-than-expected U.S. economic data, alongside oil prices
CL.1,
-0.86%
this week rising to a 10-month high, have raised concerns that inflationary pressures will prove stubborn and the central bank thus may have to keep borrowing costs higher for longer.

Thierry Wizman, global FX and interest rates strategist at Macquarie, said the spike in oil prices should make the FOMC “more reluctant” to signal a dovish disposition.

“Traders looking for the Fed to offer some relief from the poor sentiment induced by high oil prices won’t be satisfied, especially if high oil prices are invoked in Chair Powell’s presser as an excuse to sound ‘hawkish’,” Wizman said in emailed commentary on Wednesday morning.

See: Why Fed’s response to this key question could spark 5% stock-market pullback or ‘solid rally’

Consequently, it will be the Fed’s accompanying “dot plot” forecast for its policy interest rates, due at 2 p.m., and Chair Jerome Powell’s press conference, due to start at 2:30 p.m., that will contain potential market moving news.

“Ahead of the FOMC meeting, yields on 10-year U.S. Treasuries are reaching a new cycle high, and with investors seemingly inclined to hold onto their recently established long positions in the dollar, all signposts point to a hawkish direction, said Stephen Innes, managing partner at SPI Asset Management.

Matthew Raskin, strategist at Deutsche Bank, said in a note that traders’ main focus will be on the Fed’s summary of economic projections and the so-called dot plot.

“There have been a lot of news reports that the median rate projections, or dots, for next year and beyond could move up to reinforce a message of higher-for-longer,” he said. “This is quite possible, but in extracting signal from any moves it will be important to consider the degree of underlying shifts in the dots and how the chair characterizes any changes in his press conference.”

Companies in focus

• Instacart
  CART,
  +12.33%
  shares were down 4% in premarket trade, following an IPO in which they finished up 12%.

• General Mills Inc.
  GIS,
  -0.33%
  gained 1% after the branded consumer foods company reported fiscal first-quarter results that topped expectations and affirmed its full-year outlook, as inflation has moderated, supply chains have stabilize and an “increasingly cautious consumer” has remained resilient.

• Coty Inc.’s
  COTY,
  -1.04%
  jumped 4.6% in premarket trade Wednesday, after the beauty, cosmetics and fragrance giant raised guidance for fiscal 2024, boosted by strength in its prestige fragrance business.