S&P 500 Futures, yields grind higher as market appears dicey ahead of key central bank moves

• Risk profile weakens on full markets’ return, pre-Fed consolidation continues.
• US Treasury Yields float near multi-day top, Japan 10-year bond coupons jumped to the highest since 2016.
• Stock future struggle to defend its latest corrective bounce amid inflation concerns.
• China, Russia concerns join light calendar to test traders.

Market sentiment remains sidelined, fading the week-start cautious optimism, as traders from Japan and the UK return from an extended holiday on Tuesday. Also weighing on the market’s mood could be the latest headlines surrounding yields and geopolitics, as well as inflation concerns.

While portraying the mood, the S&P 500 Futures fade the previous day’s bounce off a two-month low around 3,920 whereas the US 10-year and 2-year Treasury yields remain sidelined at the highest levels since April 2011 and October 2007 in that order. Also, Japan’s 10-year Government Bond yields (JGBs) jump to the highest since 2016.

Softer housing data from the US and downbeat inflation expectations joined the absence of Tokyo and London to portray the market’s corrective pullback on Monday. the US inflation expectations, as per the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, dropped for the third consecutive day to a two-month low near 2.34% by the end of Monday’s North American trading session. More importantly, the 5-year breakeven inflation rate per the FRED data dropped to the lowest levels since September 2021, at 2.44% at the latest. The same raised concerns about the market’s surprise reaction to the hawkish Fed bets. On the same line, the US NAHB Housing Market Index fell for a ninth consecutive month to 46 versus 48 expected and 49 prior.

However, geopolitical fears surrounding China and Europe join hawkish Fed bets to keep bears hopeful. On Monday, US President Joe Biden said, “I'm more optimistic than I have been in a long time.” The national leader also stated that they are going to get control of inflation. However, US President Biden’s readiness to back Taiwan in case China attacks Taipei and the hawkish hopes for the Fed seemed to weigh on the gold price ahead of the key monetary policy announcements. In a response to US President Biden’s comments, China’s Foreign Ministry said on Monday that Beijing “deplores and firmly opposes this and has lodged stern representations.” Elsewhere, Germany’s Bundesbank said that it expects the German economy to shrink markedly in the autumn and winter months amid reduced or rationed energy consumption, as reported by Reuters.

That said, the CME’s FedWatch tool hints at 82% chance of the 75 basis points of a Fed rate hike during Wednesday’s monetary policy meeting. Also, the tool signals around 18% odds favoring the full one percent upside in the rate by the Fed.

Moving on, second-tier US housing data and chatters surrounding China can entertain traders ahead of Wednesday’s Federal Open Market Committee (FOMC).