S&P 500 futures struggle to extend rally as bond yields rise

What’s driving markets

U.S. stock-index futures were struggling to make headway as global bond yields rose on expectations the Bank of Japan will soon exit its ultra-loose monetary policy. The Nikkei 225 equity index
JP:NIK
fell 1.8%, the Japanese yen
USDJPY,
-1.47%
jumped 1.3% and 10-year Japanese government bond yields
BX:TMBMKJP-10Y
spiked 11 basis points.

The recent Wall Street rally, which saw the S&P 500 gain 8.9% just in November, has struggled to maintain its momentum this week as some traders also question whether the market has become too optimistic about the Federal Reserve starting to cut interest rates by the spring of 2024.

Lower inflation alongside signs of a cooling labor market have helped push benchmark 10-year Treasury yields
BX:TMUBMUSD10Y
down from a 16-year high of 5% in October to nearly 4.1% during Wednesday’s session. The chances of the Fed trimming borrowing costs by at least 25 basis points at its March meeting has risen to 58.4% from just 22% a month ago.

Investors will thus wish to see confirmation from Thursday’s weekly unemployment claims data, due at 8:30 a.m. Eastern, and Friday’s nonfarm payrolls report, that the slower jobs market will help ease inflationary pressures.

“Get out the popcorn, it could be an entertaining 48 hours as traders jockey for position into and eventually out of the granddaddy of all economic releases, U.S. nonfarm payrolls,” said Stephen Innes, managing partner at SPI Asset Management,

However, Innes warned that investors should be careful wishing for weak jobs reports. “Without stating the obvious, the U.S. labor market is showing signs of contracting much faster than expected. This is not necessarily a ‘risk-on’ panacea, especially if the downward momentum in the jobs markets picks up a good head of steam,” he said.

Such concerns that soft jobs data presages a worse-than-expected economic downturn means traders may react positively if the nonfarm payrolls report is stronger than forecast, according to Tom Lee, head of research at Fundstrat.

“[T]he market could rally Friday, even if we get a strong Nov. employment report. Why? I think the details favor a soft wage (avg. hourly earnings) or even a rise in labor supply. We had said that there is upside risk to Nov. jobs report of +187k due to workers returning from strike and seasonal hiring plus better weather. But now, we see this having less ‘downside zag’ to stock prices,” said Lee.

Other data on Wednesday includes the October wholesale inventories at 10 a.m., and consumer credit for October at 3 p.m.

Companies reporting earnings on Thursday include Dollar General
DG,
+0.40%
before the market opens and Broadcom
AVGO,
-1.04%,
Lululemon
LULU,
+0.82%
and DocuSign
DOCU,
+2.82%
after the close.