U.S. Stock Futures Rise Ahead of Federal Reserve's Policy Decision

Stock-index futures in the United States are inching towards fresh highs in 2023 as investors eagerly await the Federal Reserve's policy decision, forecasts, and commentary later in the day.

Stock-Index Futures Trading Update

• S&P 500 futures (ES00) are up by 51 points or 0.1%, reaching 37018.
• Dow Jones Industrial Average futures (YM00) have risen by 6 points or 0.1% to 4703.
• Nasdaq 100 futures (NQ00) gained 24 points or 0.1%, hitting 16599.

Previous Day's Performance

On Tuesday, the Dow Jones Industrial Average (DJIA) experienced a 173-point increase, equivalent to a 0.48% rise, closing at 36578. The S&P 500 (SPX) also saw a gain of 21 points or 0.46%, reaching 4644. Additionally, the Nasdaq Composite (COMP) recorded a 101-point gain, signifying a 0.7% increase and closing at 14533.

Market Outlook

The S&P 500 is currently at its highest level since mid-January 2022, showcasing an impressive rally of 21% since the beginning of the year. This upward momentum is fueled by optimism that the Federal Reserve will not raise borrowing costs further due to the recent cooling inflation.

Furthermore, the CBOE VIX Index (VIX), which serves as an option-based volatility gauge and tends to decrease during bullish market sentiment, closed Tuesday's session at its lowest level in over four years.

Federal Reserve Policy Announcement

The Federal Reserve will conclude its two-day policy meeting on Wednesday. Market participants are currently predicting with a 98.2% probability that the Fed will announce at 2 p.m. Eastern Time that it will maintain interest rates at a range of 5.25% to 5.50%. A similar outcome is also expected at the next meeting in January.

It is worth noting that the market is speculating that the Fed's next move will be to cut rates after the May meeting. Consequently, traders will pay close attention to the Fed's forecasts and the comments from Chair Jerome Powell, which are scheduled to begin at 2:30 p.m., to verify if this narrative aligns with their expectations.

U.S. Producer Prices Data and the Fed's Outlook: Impacts on Market Optimism

The eagerly-awaited U.S. producer prices data for November, offering a glimpse into inflationary pressures along the supply chain, is expected to be released at 8:30 a.m.

In the shorter term, market sentiment will largely depend on the Federal Reserve's outlook. Over the last couple of months, optimism has been steadily rising, setting the stage for potentially significant market movements. Richard Hunter, the head of markets at Interactive Investor, emphasized that any mention of potential rate cuts next year would be of particular interest to investors since the Fed has not yet alluded to this possibility. The central bank has maintained its stance that, based on the available information, it expects interest rates to remain elevated until victorious progress against inflation can be declared.

However, despite this narrative, there is cause for caution. Core annual inflation, which excludes volatile items such as food and energy, continues to run at double the Fed's 2% target. As a result, there is a risk that the Fed may challenge investors' optimism surrounding possible rate cuts. Jim Reid, a strategist at Deutsche Bank, reiterates this sentiment, explaining that their economists anticipate Federal Reserve Chair Jerome Powell will stop short of declaring the tightening cycle over, instead emphasizing the preparedness to tighten policy further if necessary.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, also predicts that Powell will seek to manage market optimism and address expectations of rate cuts. She suggests that if this materializes, we should expect a period of correction and consolidation in bond and stock valuations in the final weeks of the year.