S&P500 Futures struggle at nine-month high, yields prod five-day uptrend amid cautious markets

• Market sentiment turns cautious amid fresh challenges to sentiment.
• Fears of no immediate US debt ceiling deal, US-China tension prod previous risk-on mood.
• S&P500 Futures print mild gains at the highest levels since August 2022, US Treasury bond yields retreat from multi-day top.
• Fed Chair Powell’s speech, US President Biden’s conference eyed for clear directions.

Risk profile fades the previous optimism on early Friday as markets approach the week’s key events. Also challenging the sentiment could be the risk-negative headlines from the US House of Representatives and surrounding the US-Taiwan trade deal. However, the hopes of avoiding US default and recently positive US data, tame the pessimism.

Amid these plays, S&P500 Futures struggle to refresh the yearly top as it prints mild gains near 4,220 after rising to the highest levels since August 2022 the previous day. That said, the US 10-year and two-year Treasury bond yields also hesitate in extending the five-day uptrend at the monthly tops surrounding 3.64% and 4.25% in that order.

On Thursday, the market’s optimism surrounding the US debt ceiling extension joined with upbeat US data to allow Wall Street and the US Dollar Index (DXY) to remain firmer. The same, however, exerted downside pressure on the top-tier commodities and Antipodeans before the latest consolidation.

The market’s latest shift could be linked to headlines suggesting the US House Freedom Caucus’s capacity to block any agreement to raise the $31.4 trillion debt ceiling from passing the House of Representatives, per Reuters. Also challenging the optimists is the US-Taiwan trade deal ahead of planned meetings between China's Commerce Minister Wang Wentao and USTR Tai and US Commerce Secretary Gina Raimondo, which in turn can propel the Sino-American tension and prods the US Dollar advances.

Previously, the US Dollar Index (DXY) rallied to the highest levels since early March after the market’s bets on the US Federal Reserve (Fed) rate cut in 2023 dropped while the odds of a 0.25% rate hike in June increased amid firmer US data and hawkish Fed talks.

Talking about the data, US Initial Jobless Claims for the week ended on May 12 dropped to 242K on Thursday, versus 254K expected and 264K prior whereas the Philadelphia Fed Manufacturing Survey gauge for May improved to -10.4 from -31.3 prior, versus -19.8 market forecasts. Further, US Existing Home Sales for April eased to 4.28M versus analysts’ estimations of 4.3M and 4.44M prior. It’s worth noting that the US Retail Sales and Industrial Production for April printed upbeat figures earlier in the week and inspired the Fed hawks to defend their “higher for longer rates” bias.

That said, Dallas Federal Reserve President Lorie Logan said on Thursday, as reported by CNBC, that data at this time does not support skipping an interest rate hike at the next meeting in June. On the same line, Fed Governor Philip Jefferson said on Thursday that inflation remains too high whereas St Louis Fed President James Bullard reiterated his support for higher rates.

Moving forward, Federal Reserve (Fed) Chairman Jerome Powell’s speech and US debt ceiling negotiations will be the key for the traders to watch as US President Joe Biden said to have the decision to avoid a default by Sunday. Also important will be China’s reaction to the US-Taiwan trade deal.

Also read: Forex Today: Not even risk appetite slows the Dollar