U.S. stock futures weaken after best start to a quarter since 1938

What’s driving markets

Wall Street was on course Wednesday for a relatively mild pullback, as stock index futures suffered some selling after a sturdy rally over the past two sessions.

The S&P 500 has just enjoyed its largest two day percentage gain since April 2020, and the best start to a quarter since 1938, according to Dow Jones Market data.

The bounce followed three quarters of declines, the worst such run since 2008, during which time the S&P 500 fell 24.8% to a near two-year trough as investors worried that the Federal Reserve’s interest rate hikes to crush inflation would harm the economy.

However, recent soft U.S data, covering job openings and manufacturing, have encouraged some traders to trim bets on aggressive Fed interest rate rises.

A week ago markets were forecasting the Fed’s benchmark interest rate would peak at nearly 4.8% by April 2023, but that figure has come down to 4.5%.

Atlanta Fed President Raphael Bostic will speak at 4 p.m. Eastern.

Johanna Chua, chief Asia economist at Citi, said that though U.S economic growth remained in better shape than other countries and Fed officials continued to sound hawkish, the market risked being wrongfooted by any signs that interest rates could soon peak.

“Even as the overall fundamental setup has not changed… trimming of bearish risk/bearish rates/bullish USD positions has driven a sharp reversal,” Chua said.

This view that oversold conditions and overly bearish sentiment was a key contributor to the latest advance was endorsed by Tom Lee, head of research at Fundstrat, though he accepted that bulls may be chastened by the recent past.

“Given the generally poor win-ratio for rallies in 2022, investors are naturally viewing the gains over the past two days as just another ‘bear market rally’,” said Lee in a note to clients.

Still, a number of shifting factors suggest the positive run could continue according to Lee.

These included the dip in Fed fund futures; a 5% pullback in the dollar index
DXY,
+0.88%
; and the VIX volatility index
VIX,
+1.48%
moving back below 30 with VIX futures back in contango.

See: The stock market is surging as the U.S. dollar retreats. It’s all about bonds.

In addition: “the Nasdaq 100 was ‘100% bid’ Tuesday…since 1996, this has only happened 6 times, and 6 of 6 times the [Nasdaq 100] is higher 6M and 12M later with average gains of 27% and 34%,” said Lee.

Stock futures remained lower after ADP said private-sector payrolls rose by 208,000 in September. Economists surveyed by The Wall Street Journal had expected a rise of 200,000. The Labor Department will release the official September jobs report on Friday.

“All eyes are on the employment data on Friday, which has priced in tremendous one day volatility in the options market,” said Stephen Innes, managing partner at SPI Asset Management.

The U.S. trade deficit in August fell to $67.4 billion, the lowest level since mid 2021. Economists surveyed by the Wall Street Journal forecasted a trade deficit of $70.5 billion.

Other U.S. economic data set for release on Wednesday include the September S&P Global service sector PMI survey at 9:45 a.m. and the September ISM services report at 10 a.m.

Companies in focus

• Shares of Helen of Troy Ltd. 
  HELE,
  +3.41%
  plunged 15.5% in premarket trading Wednesday, after the consumer products company, with brands including OXO, Hydro Flask and Braun, reported fiscal second-quarter earnings that beat expectations but cut its full-year outlook, as rising inflation has prompted consumers to change their spending patterns.