S&P 500 Futures portray pre-Fed market consolidation, Japan’s holiday chains yields

• S&P 500 Futures extend bounce off yearly low, US Treasury yields stay near multi-year high.
• Off in Japan, China adds strength to the pre-Fed trading lull.
• Fed’s preference for orderly markets, geopolitical and covid-led challenges test hawks amid mostly priced-in outcomes.
• US ISM Services PMI, ADP Employment Change will be important to watch as well.

Global markets remain jittery, mildly positive though, as traders remain cautious ahead of the key Federal Open Market Committee (FOMC) meeting outcome, up for release late Wednesday. In addition to the pre-Fed anxiety, holidays in China and Japan also restrict the market moves.

Even so, the S&P 500 Futures print mild gains while marching towards 4,200, up for the third consecutive day. However, the US 10-year Treasury yields remain inactive at around a 3.0% rate as an off in Tokyo limits bond moves in Asia.

Underpinning the latest optimism could be a pullback in the US bond yields from the highest levels since December 2018. More importantly, expectations that the US Federal Reserve (Fed) will match the widely anticipated, as well as priced in, 50 basis points (bps) of a rate hike and provide hints of balance sheet normalization also back the latest consolidation.

While considering the same, the Australia and New Zealand Banking Group (ANZ) said, “Given the weight the FOMC puts on forward guidance and a preference for orderly market moves, particularly given current geopolitics and the slowdown in China, such a surprise seems unlikely.”

It’s worth noting that the US dollar bears the burden of the market’s indecision as it stays ground around its 20-year top, recently sidelined near 103.50. This ignores the strong JOLTS Job Openings and Factory Orders for March data published the previous day. Also, escalating geopolitical fears and covid woes would have also underpinned the US dollar strength but could not.

Looking forward, the Fed’s battle to tame the inflation will be crucial to watch but the monthly print of US ISM Services PMI and ADP Employment Change will also be important for clear directions. Additionally, updates from Russia and China are likely to help in making trade decisions as well.

Read: Fed May Preview: 'Less hawkish' is the new dovish