Monetary Policy Worries May Continue To Weigh On Wall Street

The major U.S. index futures are currently pointing to a lower open on Wednesday, with stocks likely to extend the significant drop seen in the previous session.

Lingering worries about the outlook for monetary policy are likely to weigh on the markets amid concerns the Federal Reserve plans to tighten monetary policy more aggressively than previously anticipated.

Fed Governor Lael Brainard’s comments from Tuesday may continue to generate selling pressure, as she predicted the Fed would start reducing its balance sheet at a “rapid pace” as soon as the May meeting.

Early trading activity may be somewhat subdued, however, with traders awaiting the release of the minutes of the Fed’s March meeting.

The Fed minutes, which are scheduled to be released at 2 pm ET, may shed additional light on the central bank’s thinking about the outlook for interest rates.

At the meeting, the Fed decided to raise interest rates for the first time since December 2018 and forecast rates would reach 1.9 percent by the end of the year.

A number of media outlets have said the forecast points to six quarter-point rate hikes this year, but recent comments from Fed officials have suggested the central bank could opt to raise rates by 50 basis points at upcoming meetings.

CME Group’s FedWatch tool is currently indicating a 76.6 percent chance the Fed will raise rates by 50 basis points next month.

Stocks moved significantly lower over the course of the trading day on Tuesday, offsetting the upward move seen over the two previous sessions. The major averages all moved to the downside, with the tech-heavy Nasdaq posting a particularly steep loss.

Selling pressure intensified in the final hour of trading, dragging the major averages down to new lows for the session. While the Nasdaq plunged 328.39 points or 2.3 percent to 14,204.17, the S&P 500 tumbled 57.52 points or 1.3 percent to 4,525.12 and the Dow slid 280.70 points or 0.8 percent to 34,641.18.

The weakness that emerged on Wall Street reflected renewed concerns about the outlook for monetary policy following comments from Brainard.

Brainard described inflation as “much too high” during remarks at a Minneapolis Fed conference and predicted the Fed would start reducing its balance sheet at a “rapid pace” as soon as the May meeting.

“Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery,” Brainard said in prepared remarks.

She added, “The reduction in the balance sheet will contribute to monetary policy tightening over and above the expected increases in the policy rate reflected in market pricing and the Committee’s Summary of Economic Projections.”

In U.S. economic news, the Institute for Supply Management released a report showing U.S. service sector growth reaccelerated in the month of March.

The ISM said its services PMI rose to 58.3 in March from 56.5 in February, with a reading above 50 indicating growth in the sector. Economists had expected the index to rebound to 58.0.

The slightly bigger than expected increase by the services PMI follows three consecutive monthly decreases after the index reached a record high in November.

A separate report released by the Commerce Department showed the U.S. trade deficit was nearly unchanged in February, as imports and exports both increased.

Semiconductor stocks pulled back sharply after turning in a strong performance on Monday, resulting in a 4.5 percent nosedive by the Philadelphia Semiconductor Index.

Substantial weakness also emerged among oil service stocks, as reflected by the 3.1 percent plunge by the Philadelphia Oil Service Index.

The sell-off by oil service stocks came as the price of crude oil turned notable lower over the course of the session, with crude for May delivery slumping $1.32 to $101.96 a barrel.

Computer hardware stocks also saw considerable weakness on the day, dragging the NYSE Arca Computer Hardware Index down by 3 percent.

Housing, gold, steel and networking stocks also moved notably lower, while some strength was visible among pharmaceutical and utilities stocks.

Commodity, Currency Markets

Crude oil futures are jumping $1.24 to $103.20 a barrel after slumping $1.32 to $101.96 a barrel a barrel on Tuesday. Meanwhile, an ounce of gold is trading at $1,929.60, up $2.10 compared to the previous session’s close of $1,927.50. On Tuesday, gold fell $6.50.

On the currency front, the U.S. dollar is trading at 123.75 yen compared to the 123.60 yen it fetched at the close of New York trading on Tuesday. Against the euro, the dollar is trading at $1.0935 compared to yesterday’s $1.0905.

Asia

Asian stocks tumbled on Wednesday, the U.S. dollar strengthened and bond yields surged as investors pondered the possibility of aggressive monetary tightening by the U.S. Federal Reserve to fight inflation.

Rate hike worries took center stage after Fed Governor Lael Brainard signaled the U.S. central bank would take a hawkish stance to combat inflation.

She expects a combination of interest rate hikes and a rapid balance sheet runoff to take U.S. monetary policy to a more neutral position later this year.

Disappointing service sector data from China, the threat of new sanctions on Russia and a worsening Covid-19 situation in China also dented investor sentiment.

Chinese shares ended on a flat note as markets in the mainland reopened after two days of public holidays.

The benchmark Shanghai Composite index finished marginally higher at 3,283.43 despite an extended lockdown in Shanghai and data showing activity in China’s services sector contracted at the steepest pace in two years in March.

Hong Kong’s Hang Seng Index plunged 1.9 percent to close at 22,080.52, as tech stocks surrendered gains from two days of rebound.

Japan’s Nikkei 225 Index fell 1.6 percent to 27,350.30, marking its biggest daily fall since March 11, amid caution over the corporate outlook and ahead of the announcement of fresh sanctions against Russia later today.

The United States and its allies will impose new sanctions on Russian banks and officials and ban new investment in Russia, the White House said.

SoftBank Group, Daikin Industries and Tokyo Electron fell 3-4 percent, while Cosmo Energy Holdings soared 13.4 percent after activist investor City Index Eleventh and its associate took a 5.8 percent stake in the crude oil importer and refiner.

Australian markets ended lower, dragged down by technology stocks. Novonix and Block Inc. both slumped around 6.9 percent amid concerns about accelerated interest rate hikes.

On the positive side, the big four banks all rose around 1 percent amid speculation the Reserve Bank of Australia will lift the cash rate by 15 basis points as early as June. The benchmark S&P ASX 200 Index slipped half a percent to settle at 7,490.10.

Seoul stocks fell notably, with the Kospi ending down 0.9 percent at 2,735.03 on rate hike and Ukraine woes. Heavyweight Samsung Electronics fell 1 percent to hit a 16-month low, while chipmaker SK Hynix lost 3 percent.

Europe

European stocks have moved sharply lower on Wednesday, with weak German data, uncertainty ahead of Sunday’s first round presidential vote in France and hawkish comments from Fed Governor Lael Brainard weighing on sentiment.

Markets also await fresh sanctions to punish Moscow over alleged atrocities in Ukraine, something Ukraine President Volodymyr Zelensky described as “war crimes.”

The European Commission has already proposed new sanctions, including banning Russian coal imports, raising worries about a new global supply challenge.

While the U.K.’s FTSE 100 Index has fallen by 0.4 percent, the German DAX Index is down by 1.8 percent and the French CAC 40 Index is down by 2.1 percent.

Volkswagen has fallen on reports that the German automotive giant plans to axe many internal combustion engine models around the world by the end of the decade.

Danish wind turbine maker Vestas has also declined after saying it has decided to withdraw completely from Russia over Moscow’s incursion into Ukraine.

British homebuilder Redrow has also moved to the downside after saying it would make an additional provision of £164 million for cladding repairs.

On the other hand, Hyve Group has risen. The event organizer is selling its Russian operations to Rise Expo Ltd. for up to £72 million.

Imperial Brands has also rallied. The tobacco company said it remains on track to deliver full-year results in line with guidance issued on March 15.

In economic news, German factory orders decreased 2.2 percent month-on-month in February, in contrast to the 2.3 percent increase in January, data from Destatis revealed.

The German construction sector registered a sharp slowdown in activity growth in March as the Ukraine war dampened demand, prices as well as supply, survey results from S&P Global showed.

Meanwhile, the U.K. construction sector logged another robust month of growth, survey results published by S&P Global showed.

U.S. Economic Reports

Philadelphia Federal Reserve President Patrick Harker is scheduled to speak virtually on the economic outlook before the Delaware State Chamber of Commerce at 9:30 am ET.

At 10:30 am ET, the Energy Information Administration is due to release its report on oil inventories in the week ended April 1st.

Crude oil inventories are expected to decrease by 3.0 barrels after falling by 3.4 million barrels in the previous week.

The Federal Reserve is scheduled to release the minutes of its March monetary policy meeting at 2 pm ET. At the meeting, the Fed decided to raise interest rates for the first time since December 2018.

Stocks In Focus

Shares of Array Technologies (ARRY) are moving sharply higher in pre-market trading after the provider of utility-scale solar tracker technology reported better than expected fourth quarter revenue and provided upbeat guidance. Array also named Kevin Hostetler its new CEO.

Nutritional food and snack maker Simply Good Foods (SMPL) may also move to the upside after reporting fiscal second quarter results that exceeded analyst estimates and raised its full-year outlook.

Shares of Gogo Inc. (GOGO) are also seeing significant pre-market strength following news the inflight internet and entertainment provider will replace SPX FLOW Inc. (FLOW) in the S&P SmallCap 600 effective prior to the start of trading on Friday.

On the other hand, shares of Spirit Airline (SAVE) are moving lower in pre-market trading after the discount airline said it has received a $3.6 billion cash takeover offer from JetBlue (JBLU). Spirit previously agreed to be acquired by Frontier Airlines parent Frontier Group (ULCC) for $2.9 billion.

Semiconductor giant (INTL) may also see initial weakness after revealing it has suspended all business operations in Russia in reaction to the invasion of Ukraine.