US open: Stocks extend losses after a hawkish Powell

US futures

Dow futures -0.5% at 31969

S&P futures -0.86% at 3722

Nasdaq futures -1.04% at 10770

In Europe

FTSE -0.04% at 7142

Dax -1.2% at 13085

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Market prices in a higher terminal rate

US futures are slumping lower, extending losses from the previous session as the reality of a higher peak interest rate level sets in.

Once again, the market had gotten ahead of itself, looking for a dovish pivot from the Fed. Whilst the Fed acknowledged the slowdown in rate hikes that the market was looking for, it didn’t bargain with Fed Chair Powell raising expectations for the terminal rate.

The peak rate rising to 5% set fear into the market, with more rate hikes coming. This inevitably means more pain for households and raises the possibility of a recession. However, the Fed has been clear that a recession is the lesser of the two evils that it faces. High inflation becoming embedded in the economy is the greater risk.

The repricing of expectations saw the Nasdaq close 3.3% lower yesterday and the S&P500 book losses of 2.5%.

Initial jobless claims unexpectedly fell to 217k, down from 218k and below forecasts of 220k. The data highlights the ongoing strength in the labour market and supports the Fed’s more hawkish stance.

Looking ahead, ISM non-manufacturing PMI data is also expected to reveal strong growth of 55.5 in October, slightly down from 56.7 in September.

Corporate news:

Peloton falls 16% pre-market after the exercise equipment maker forecast Q2 revenue below expectations as it continues to battle weak demand.

Moderna falls 12% after cutting annual sales forecast for its COVID vaccine amid short-term supply constraints.

Where next for the S&P500?

The S&P500 has fallen below is 20 & 50 sma as it closes in on 3700. This, plus the bearish crossover on the MACD keeps sellers hopeful of further losses. A break below 3700 round number could bring 3570 into focus and 3490 the 2022 low. Should buyers defend 3700 a move over 3800 the October high and 50 sma could brinf3915 the November high into focus.

FX markets – USD falls, GBP tumbles

The USD rising, adding to gains from the previous session as the market continues to digest the hawkish comments from Fed Chair Jerome Powell.

EURUSD is falling after ECB’s Lagarde failed to lift the common currency with her comments. The lack of Eurozone data leaves the euro to struggle in the hands of a stronger USD.

GBPUSD is falling sharply lower after the BoE raised interest rates by 75 basis points, in line with expectations, but also said that peak interest rates were less than what the market implies. The UK economy is heading for a recession as the cost of living crisis and higher interest rates hurt businesses and consumers. This will lessen the need for the BoE to hike aggressively. The BoE is looking for a recession to do some of the heavy lifting with brining inflation back to target. His comments have hit the pound whilst it was down and 1.10 is coming back into focus.

Oil falls post Fed

Oil prices are falling after as the prospect of more rate hikes hurts the demand outlook. With US interest rates now expected to rise to 5%, fears of a deeper economic slowdown have risen. Furthermore, the stronger dollar following the hike is also pulling the price lower.

Losses are being capped by tighter supply as OPEC saw output fall. The group of oil-producing nations pumped 2.71 million barrels per day, down 20k bpd from September. The group produced 1.36 million barrels below target.

WTI crude trades -1.4% at $88.15

Brent trades -1.4% at $94.56.

Learn more about trading oil here.

Looking ahead

14:30 EIA crude oil inventory

18:00 Fed interest rate decision

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