U.S. equity futures decline as market projects more rate hikes

Equity futures in the U.S. declined on Monday as the market projected that the central bank would further tighten its monetary policy to tame inflation.

The S&P 500 and Nasdaq 100 futures contracts declined by more than 0.3 percent, showing further downward pressures for the U.S. equity market after it ended mixed last week. The Dow Jones fell by 0.1 percent last week, while the S&P 500 lost 0.3 percent. Nasdaq was the only major index on Wall Street that concluded last week on the green with a 0.6 percent increase.

The U.S. equity market rebounded in the first few weeks of 2023 as investors initially expected the central bank to pause its tightening cycle. However, analysts said the latest inflation data had hampered investors' expectation that the Federal Reserve would soon make a policy pivot.

"We're in for a more volatile ride and I think the market is finally waking up to rates are going to stay higher for longer," Essex Financial Services CEO Chuck Cumello said.

Pepperstone Group head of research Chris Weston also said that the higher interest rate expectations among investors would "eventually open up the downside in equity markets."

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“While some will focus on US-China relations and point to upcoming meetings between the Chinese and Russians this week, the repricing and push higher in interest rate expectations will eventually open up the downside in equity markets."

Chris Weston, Head of Research at Pepperstone Group

The Fed has consecutively increased interest rates since March 2022 to control the fast-paced inflation. However, data from January showed high retail sales and a strong labor market, which analysts said might push the central bank to maintain its hawkish policy for a more extended period.

According to the current market consensus, interest rates will peak at around 5.12 percent by midyear. The current federal funds rate ranges from 4.50 percent to 4.75 percent. The Fed will likely have two more rate hikes in the coming months.

The shift in market sentiment further propped up the U.S. bond yields. The two-year Treasury bond yields 4.6 percent, while the 10-year note yields 3.86 percent. Data showed that the yield curve remained inverted, which has historically indicated a future recession for the U.S.

This Friday, the U.S. government will publish personal consumption expenditure (PCE) data — an inflation indicator based on changes in personal consumption. Analysts forecast a month-over-month increase of 0.5 percent in PCE for January. Meanwhile, the year-over-year PCE inflation is expected to remain the same at five percent.

Volatile markets in other countries

Like the U.S., equity markets in other parts of the world also showed volatility at the beginning of the week.

Futures contracts on the European STOXX 600 index, which tracks the performance of large mid and small-cap firms across 17 countries in Europe, declined by 0.28 percent on Monday. Analysts said investors also anticipated that the region's central bank would continue tightening its rate policy.

The European Central Bank increased the key interest rates by 50 basis points earlier this month. Officials at the ECB had earlier said the bank would have another rate hike in the upcoming rate-setting meeting.

Meanwhile, in Asia, Hong Kong's Hang Seng index opened the trading session lower at 20,859.50 on Monday. Meanwhile, China's CSI 300 index posted its best one-day increase since November on the same day. Goldman Sachs said China's equity market could grow as much as 20 percent of its current level this year.

In Oceania, two-year bond yields in New Zealand and Australia rose. The Reserve Bank of New Zealand is expected to increase its benchmark rates by 50 basis points on Wednesday.

Oil trading was also "choppy" in various parts of the world as expectations of further monetary tightening by central banks grew against signs of higher fuel demand from China. Meanwhile, gold prices remained flat.