Futures slide as hawkish Fed quashes policy pivot hopes

[December 15, 2022]   By Sruthi Shankar

(Reuters) -U.S stock index futures dropped on Thursday, a day after the Federal Reserve raised interest rates as expected, but rattled investors by saying rates would remain higher for longer.

The Fed's policy-setting committee projected it would continue raising rates to above 5% in 2023, a level not seen since a steep economic downturn in 2007, quashing hopes that the central bank would hit the brake on its hiking-cycle early next year.

Investors currently expect at least two 25 bps rate hikes next year and borrowing costs to peak at 4.9% by May next year, before falling to around 4.4% by year-end.

"The issue was the market was looking for rate cuts in 2023 and that's not compatible with any credible economic scenario because you'd need to have quite a collapse in economic activity and a speedy deterioration of the labor market," said Willem Sels, Global CIO, Private Banking & Wealth Management at HSBC.

The U.S. central bank hiked rates by 50 basis points (bps) on Wednesday, slowing down from four back-to-back 75 bps hikes, although Fed Chair Jerome Powell said recent signs of slowing inflation have not brought any confidence yet that the fight had been won.

Since October, when they hit year-lows, Wall Street's main indexes have staged a strong recovery on hopes of a less aggressive Fed, but the rally stalled in December due to mixed economic data and worrying corporate forecasts.

"The market is waking up to the fact that the priced in pivot may be a little too optimistic ... the rate cuts that we are foreseeing are only in 2024," Sels said.

Screens on the trading floor at New York Stock Exchange (NYSE) display the Federal Reserve Chair Jerome Powell during a news conference after the Federal Reserve announced interest rates will raise half a percentage point, in New York City, U.S., December 14, 2022. REUTERS/Andrew Kelly

A slew of economic data, including weekly jobless claims, retail sales data and industrial production, is due later in the day, as are interest rate decisions from the European Central Bank and the Bank of England. Both central banks are expected to hike borrowing costs by 50 bps.

At 6:41 a.m. ET, Dow e-minis were down 240 points, or 0.71%, S&P 500 e-minis were down 39.75 points, or 0.99%, and Nasdaq 100 e-minis were down 153 points, or 1.29%.

Shares of megacap companies, including Apple, Amazon.com Inc, Microsoft Corp and Nvidia Corp, fell between 1.1% and 2.1% in premarket trading.

Tesla Inc fell 1.7% after boss Elon Musk disclosed another $3.6 billion in stock sales, taking his total near $40 billion this year and frustrating investors as the company's shares wallow at two-year lows.

Trade Desk Inc slipped 4.1% after Jefferies downgraded its rating for the adtech firm to "hold" from "buy".

(Reporting by Sruthi Shankar and Ankika Biswas in Bengaluru; Editing by Savio D'Souza and Vinay Dwivedi)

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