Pullback By Treasury Yields, Oil Prices May Lead To Initial Strength On Wall Street

The major U.S. index futures are currently pointing to a modestly higher open on Wednesday, with stocks likely to move back to the upside after ending the previous session slightly lower.

The upward momentum on Wall Street comes as traders look ahead to the Federal Reserve’s monetary policy announcement this afternoon, with the central bank widely expected to leave interest rates.

Traders are likely to pay close attention to the accompanying statement and the central bank’s projections for clues about the outlook for rates.

With the announcement just hours away, CME Group’s FedWatch Tool is currently indicating a 99.0 percent chance the Fed will leave rates unchanged.

Meanwhile, the likelihood of another rate hike in November has seemingly decreased in recent days. The FedWatch Tool currently indicates just a 28.9 percent chance of a quarter point rate increase.

Treasury yields are moving giving back ground ahead of the Fed announcement, with the yield on the benchmark ten-year note pulling back off its highest levels since 2007.

Buying interest may also be generated in reaction to a pullback by the price crude oil, as the recent surge in oil prices has led to renewed concerns about inflation.

After coming under pressure early in the session, stocks regained some ground over the course of the trading day on Tuesday but still closed modestly lower. The major averages all finished the day in the red, with the tech-heavy Nasdaq falling to its lowest closing level in almost a month.

The major averages remained stuck in negative territory going into the close. The Dow fell 106.57 points or 0.3 percent to 34,517.73, the Nasdaq dipped 32.05 points or 0.2 percent to 13,678.19 and the S&P 500 slipped 9.58 points or 0.2 percent to 4,443.95.

The weakness on Wall Street came as traders remained on edge ahead of the Federal Reserve’s monetary policy announcement this afternoon.

“The risks for headline inflation to heat up over the next couple of months are rising and that should complicate what the Fed does,” said Edward Moya, senior market analyst at OANDA.

“Do policymakers become convinced that despite a resilient labor market, pricing pressures will continue to ease?” he added. “If core inflation shows it is struggling to continue to drop, the higher-for-longer rate regime will last a lot longer than the market is pricing in.”

Negative sentiment may also have been generated in reaction to a Commerce Department report showing a sharp pullback in U.S. housing starts in the month of August.

The report said housing starts plunged by 11.3 percent to an annual rate of 1.283 million in August after jumping by 2.0 percent to a revised rate of 1.447 million in July.

Economists had expected housing starts to decrease to an annual rate of 1.440 million from the 1.452 million originally reported for the previous month.

With the substantial pullback, housing starts tumbled to their lowest level since hitting an annual rate of 1.266 million in June 2020.

“The sharp drop in Housing Starts this morning is concerning because housing has been one of the pillars of the economy that has held up much better than expected,” said Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance.

He continued, “If it turns out that this is the first crack in an otherwise bulletproof consumer then it could change the narrative from an economy that is impervious to rapid interest rate hikes to one that is vulnerable and susceptible to a recession.”

Meanwhile, the Commerce Department said building permits surged by 6.9 percent to an annual rate of 1.543 million in August after inching up by 0.1 percent to a revised rate of 1.443 million in July.

Building permits, an indicator of future housing demand, were expected to rise to an annual rate of 1.445 million from the 1.442 million originally reported for the previous month.

With the sharp increase, building permits reached their highest level since hitting an annual rate of 1.555 million last October.

Gold stocks showed a significant move to the downside on the day, dragging the NYSE Arca Gold Bugs Index down by 2.1 percent. The index pulled back off its best closing level in over a month. The pullback by gold stocks came despite a slight increase by the price of the precious metal.

Energy stocks also came under pressure over the course of the trading session amid a downturn by the price of crude oil. Reflecting the weakness in the sector, the Philadelphia Oil Service Index slumped by 2.1 percent and the NYSE Arca Oil Index slid by 1.1 percent.

Semiconductor and retail stocks also moved notably lower on the day, while telecom stocks moved to the upside.

Commodity, Currency Markets

Crude oil futures are sliding $0.71 to $90.49 a barrel after falling $0.28 to $91.20 a barrel on Tuesday. Meanwhile, an ounce of gold is trading at $1,952.70, down $1 compared to the previous session’s close of $1,953.70. On Tuesday, gold crept up $0.30.

On the currency front, the U.S. dollar is trading at 147.88 yen compared to the 147.86 yen it fetched at the close of New York trading on Tuesday. Against the euro, the dollar is trading at $1.0693 compared to yesterday’s $1.0679.

Asia

Asian stocks declined on Wednesday, as investors awaited the Fed’s monetary policy decision, the summary of economic projections and the updated quarterly rate projections — known as the dot plot — at the conclusion of a two-day policy meeting later in the day.

The U.S. central bank is expected to maintain current interest rates despite persistent inflation exceeding the target range. New projections may show at least one more rate hike this year.

The dollar held steady in Asian trading and gold prices were little changed, while oil prices fell nearly $1 a barrel ahead of the Fed’s interest-rate decision.

Chinese shares ended lower as growth worries lingered despite last week’s better-than-expected data.

The benchmark Shanghai Composite Index dropped 0.5 percent to 3,108.57 as the People’s Bank of China kept its benchmark lending rates unchanged. Hong Kong’s Hang Seng Index ended down 0.6 percent at 17,885.60.

Japanese shares fell notably, and the yen rose from its nearly 10-month low after U.S. Treasury Secretary Janet Yellen said any intervention by Japan to prop up the yen would be understandable if it were aimed to smooth out volatility.

Investors also digested government data that showed Japan recorded a $6.3 billion trade deficit in August amid decreases in exports and imports.

The Nikkei 225 Index fell 0.7 percent to 33,023.78, while the broader Topix Index settled 1 percent lower at 2,406, slipping further from a 33-year peak scaled last week.

Resource stocks paced the declines as oil prices fell from 10-month highs ahead of the Fed meeting.

Seoul stocks ended little changed, with the Kospi finishing marginally higher at 2,559.74, led by battery and auto stocks.

Hyundai Motor rallied 2.6 percent, its smaller affiliate Kia added 2.5 percent and auto parts-making affiliate Hyundai Mobis advanced 2.3 percent.

Australian markets fell for a third straight session amid selling in the mining, energy and technology sectors.

The benchmark S&P/ASX 200 Index dropped 0.5 percent to 7,163.30, while the broader All Ordinaries Index closed 0.5 percent lower at 7,361.90.

BHP, Rio Tinto, Santos and Woodside Energy gave up 1-2 percent, tracking lower commodity prices. Xero lost 2.8 percent in the technology sector.

Across the Tasman, New Zealand’s benchmark S&P/NZX 50 Index slipped 0.2 percent to 11,324.82 as official data showed the country’s current account deficit narrowed in the second quarter.

Europe

European stocks have advanced on Wednesday, as investors await the Fed’s summary of economic projections and the updated quarterly rate projections — known as the dot plot — at the conclusion of a two-day policy meeting later in the day.

The U.S. central bank is expected to maintain current interest rates despite persistent inflation exceeding the target range.

Investors were also reacting to positive inflation data from the region. Preliminary data from Destatis showed German producer prices declined at a record pace in August mainly due to the base effect caused by the very high price level of the previous year.

The producer price index fell 12.6 percent year-over-year in August, much faster than the 6.0 percent decline in the prior month, which was the first decline since November 2020. That was in line with economists’ expectations.

Elsewhere, data showed the U.K. consumer price inflation unexpectedly slowed in August. U.K. consumer price index posted an annual increase of 6.7 percent in August after rising 6.8 percent in July, according to the Office for National Statistics. This was the weakest inflation since February 2022.

While the U.K.’s FTSE 100 Index has advanced by 0.8 percent, the German DAX Index is up by 0.6 percent and the French CAC 40 Index is up by 0.5 percent.

Semiconductor company STMicroelectronics has shown a notable move to the upside after extending its CEO’s contract.

Ryanair Holdings has also moved slightly higher despite the Italian Competition Authority opening an investigation on its Italian unit for an alleged exclusionary abuse of dominant position.

Germany’s Merck KGaA has also risen after it entered into a new Al-led drug discovery collaboration with Escientia Plc.

Just Eat Takeaway has soared after its U.S. unit Grubhub was allowed to sue New York City over a law capping how much it can charge restaurants for delivering meals.

Housebuilder Barratt Developments, Persimmon and Taylor Wimpey have also surged after data showed British house prices increased by 0.6 percent in the 12 months to July.

German automakers BMW, Mercedes Benz and Volkswagen has also moved higher after data showed EU car sales grew 21 percent in August.

Meanwhile, Pearson has tumbled after the British education group appointed Microsoft executive Omar Abbosh as its new CEO, effective early 2024.

U.S. Economic Reports

The Energy Information Administration is scheduled to release its report on oil inventories in the week ended September 15th at 10:30 am ET.

Crude oil inventories are expected to decrease by 2.7 million barrels after jumping by 4.0 million barrels in the previous week.

The Federal Reserve is due to announce its latest monetary policy decision at 2 pm ET, followed by Fed Chair Jerome Powell’s post-meeting press conference at 2:30 pm ET.

Stocks In Focus

Shares of Coty (COTY) are moving sharply higher in pre-market trading after the multinational beauty company raised its sales growth guidance for the first half and full year FY24.

Image sharing and social media service Pinterest (PINS) is also likely to see initial strength after executives forecast an acceleration in year-over-year revenue growth during the company’s first investor day.

On the other hand, shares of Dollar General (DG) may see initial weakness after JPMorgan downgraded its rating on the discount retailer’s stock to Underweight from Neutral.