U.S. stock futures were little changed Friday after rising sharply the day before, which could lead the major indexes to break a multi-week streak of declines.
During regular trading on Thursday, the Dow rose 1.61 percent, the S&P 500 rose 1.99 percent and the Nasdaq rose 2.68 percent, with the gains possibly due to strong retail sector results that boosted sentiment. For the week so far, the Dow is up 4.4 percent and is on track to break an eight-week downtrend. The S&P 500 and Nasdaq also rose 4 percent and 3.4 percent, respectively, this week and are on track to break seven straight weeks of losses. Previously, the Dow Jones had its worst weekly streak since 1923, while the S&P 500 and Nasdaq had their worst weekly streaks since 2001. In addition to the risk of recession, investors in the U.S. stock market must also discount what the U.S. Federal Reserve will do in the near future. According to the interest rate market, the chances of a sharp tightening of monetary policy are now smaller than they were at the beginning of the month. At that time, it was estimated that the peak of the cycle could be in the region of 3.25-3.5 per cent, while currently the range is 2.75-3.00 or even lower. A reversal in expectations may also appear in statements by Fed representatives. A pause in the cycle is also possible to see how the economy responds to interest rate increases.
Inflation may also be a key issue. The core PCE inflation reading will be released today. According to market assumptions, the peak in US inflation could be set in February (5.4 percent). In March (5.2 percent), the reading was lower, and in April it is expected to be at 4.9 percent. If the forecasts come true, theoretically, at the peak of inflation, stock market indices could be close to setting the bottoms in the recent corrections. The US dollar may also be weakening for similar reasons. It is the weakest in a month and EUR/USD has already risen to near the 1.08 level from the 1.0350 area. The dollar appears to be losing value through a drop in expectations of US rate hikes, including a drop in US bond yields. There is also a chance of calming inflation readings, and in turn, the rate hike cycle may only be gaining momentum in other countries. A weaker dollar could also theoretically improve sentiment on risky assets.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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