Futures slip lower despite optimism over the U.S. economy as investors await commentary from central bankers. Oil prices push higher, while shares in Nvidia look set to lead declines in tech stocks after a report that Washington could restrict exports of artificial intelligence chips to China.
1. Futures slip lower
U.S. futures were broadly lower on Wednesday, as data pointing to strength in the U.S. economy was offset by caution ahead of an appearance by Federal Reserve Chair Jerome Powell later in the day which could provide cues on the path of interest rates.
A Wall Street Journal report that Washington was considering new restrictions on exports of artificial intelligence chips to China was also weighing on sentiment.
The three main equity averages rebounded on Tuesday, with the tech-heavy Nasdaq Composite leading the way, rising 1.6%. The blue-chip Dow Jones Industrial Average snapped a six-day losing streak while the S&P 500 rose after falling in five of the last six sessions.
Despite recent market weakness, a rally in growth stocks, an upbeat earnings season and bets that the Fed will soon end its monetary tightening mean the main indexes are on track for quarterly gains.
2. Economic optimism
Data on Tuesday indicated that the U.S. economy remained on a solid footing despite fears over the prospect of a recession, but also indicated that the Fed will likely have to keep hiking interest rates.
Separate reports showed new orders for key U.S.-manufactured capital goods unexpectedly rose in May, and sales of new single-family homes surged last month, while U.S. consumer confidence rose to an almost one-and-a-half year high in June.
The U.S. central bank paused rate hikes earlier this month but indicated that two additional rate hikes were warranted this year.
The upbeat data prompted investors to narrow the odds on a July rate hike – traders are now pricing in a roughly 77% chance the Fed will raise interest rates by 25 basis points to the 5.25%-5.50% range in its July meeting, up from 74.4% a day earlier.
3. Central bankers
With central banks sticking to hawkish commentary on the interest rate outlook investors will be paying close attention to a panel discussion at the European Central Bank annual forum in Sintra, Portugal which includes Powell, as well as ECB President Christine Lagarde and Bank of Japan Governor Kazuo Ueda.
Hawkish comments by Powell last week stalled a rally on Wall Street that had pushed the S&P 500 and Nasdaq to an over one-year high and the Dow to a six-month peak.
Lagarde said on Tuesday stubbornly high inflation will require the bank to avoid declaring an end to rate hikes.
Diverging monetary policy has pushed the yen to an almost 15-year trough against the euro and an eight-month low against the dollar, giving rise to expectations that Japan could intervene in foreign exchange markets to stem the currency’s weakness.
When Japan intervened last October it knocked the dollar down from a top of 151.94 to as low as 144.50 in a matter of hours.
4. Oil prices rise
Oil prices moved higher Wednesday after data overnight showed a larger-than-expected drop in U.S. inventories, indicating that the demand outlook remained solid.
Crude stocks fell by about 2.4 million barrels, according to a report from industry group American Petroleum Institute (API).
The Energy Information Administration’s official supply report is due out at 10:30 ET (14:30 GMT).
Brent is down about 15% this year as rising interest rates hit investor appetite, while China’s economic recovery has faltered after several months of softer-than-expected consumption and other data.
However, some analysts expect the market to tighten in the second half of the year because of ongoing OPEC+ supply cuts and Saudi Arabia’s voluntary reduction for July.
5. Nvidia hit by reports of China export curbs
Shares in Shares of NVIDIA Corporation (NASDAQ:NVDA) fell more than 4% ahead of the open on Wednesday after the Wall Street Journal reported that Washington is considering new restrictions on exports of artificial intelligence chips to China.
Shares in rival chipmakers Advanced Micro Devices (NASDAQ:AMD) and Micron were down 3.5% and 1.6%, respectively in premarket trade.
The Commerce Department will stop the shipments of chips made by Nvidia and other chip companies to customers in China as early as July, the report said. Nvidia gets about a fifth of its revenue from China.
U.S. chipmakers are caught in the crossfire between China and the Biden administration as Washington tries to curb Beijing’s technological advances.