S&P 500 Futures drop, yields dribble as “unidentified objects”, Fed’s indecision probe optimists

• Risk profile remains sour as pre-data anxiety joins geopolitical fears.
• S&P 500 Futures reverse the corrective bounce off weekly low, US Treasury bond yields grind higher.
• US, China remain confused over flying objects and raising market’s fears.
• Fed policymakers appear a bit reserved ahead of US CPI, even as inflation expectations are firmer.

Risk appetite wanes as the US inflation week begins with the weekend headlines highlighting geopolitical fears and the mixed Federal Reserve (Fed) outlook. That said, a light calendar in Asia and a cautious mood ahead of the key US Consumer Price Index (CPI) for January add strength to the market’s favor for risk safety.

While portraying the mood, the S&P 500 Futures fade the previous day’s corrective bounce off a one-week low, down 0.50% around 4,080 at the latest, whereas the US 10-year Treasury yields remain sidelined near 3.73% after refreshing a five-week high the previous day.

Although the US General turned down the market’s fears of Chinese spying on the US and the likely rush towards the safe havens, the anxiety surrounding the “unidentified objects” flying over the US and Chinese airspace propel the risk-off mood. It should be noted that the US shot down nearly four such objects while China prepares to down one in nearly a week.

Elsewhere, Philadelphia Federal Reserve President Patrick Harker pushed back the chatters of a Fed rate cut during 2023. However, the policymaker did mention, “Fed not likely to cut this year but may be able to in 2024 if inflation starts ebbing.”  Comments from Fed’s Harker were in line with Fed Chairman Jerome Powell and Richmond Federal Reserve (Fed) President Thomas Barkin who previously refrained from cheering upbeat US jobs report.  Previously, the majority of the Fed Governors and the US diplomats, including US President Joe Biden and Treasury Secretary Janet Yellen, ruled out US recession concerns and appear hawkish for the Fed. Hence, there prevails a dilemma among the Fed policymakers which in turn makes this week’s US inflation data all the more important.

On a different page, the US inflation expectations per the 10-year and 5-year breakeven inflation rates from the St. Louis Federal Reserve (FRED) remain firmer around the monthly highs marked in the last week.

It’s worth mentioning that Wall Street closed mixed after the US data pushed back dovish concerns surrounding the Fed. However, receding hopes of the economic slowdown favored the optimists, even as the US Treasury bond yields flagged recession woes. That said, preliminary readings of the US University of Michigan (UoM) Consumer Sentiment for February rose to 66.4 versus 65.0 expected and 64.9 prior. Further, the UoM noted that the year-ahead inflation expectations rebounded to 4.2% this month, from 3.9% in January and 4.4% in December.  “Long-run inflation expectations (5-year) remained at 2.9% for the third straight month and stayed within the narrow 2.9-3.1% range for 18 of the last 19 months,” stated the UoM.

Moving on, market players are likely to remain cautious and may keep favoring the safe havens, like the US Dollar, ahead of Tuesday’s US CPI. On Friday, the US Bureau of Labor Statistics announced that it revised the monthly Consumer Price Index (CPI) for December to +0.1% from -0.1%, based on updated seasonal adjustment factors.