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Market Snapshot: S&P 500 futures challenge 2023 highs as traders await Fed decision

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U.S. stock futures were inching to fresh 2023 highs early Wednesday, ahead of the Federal Reserve’s policy decision, forecasts and commentary later in the session.

How are stock-index futures trading

S&P 500 futures
ES00,
+0.14%

added 51 points, or 0.1%, to 37018

Dow Jones Industrial Average futures
YM00,
+0.15%

rose 6 points, or 0.1%, to 4703

Nasdaq 100 futures
NQ00,
+0.17%

gained 24 points, or 0.1%, to 16599

On Tuesday, the Dow Jones Industrial Average
DJIA
rose 173 points, or 0.48%, to 36578, the S&P 500
SPX
increased 21 points, or 0.46%, to 4644, and the Nasdaq Composite
COMP
gained 101 points, or 0.7%, to 14533.

What’s driving markets

The S&P 500 sits at its best level since mid January 2022, having rallied 21% since the start of the year as cooling inflation boosts hopes the Federal Reserve is finished raising borrowing costs.

The CBOE VIX Index
VIX,
an option-based volatility gauge that tends to fall when investors are more bullish, closed Tuesday’s session at its lowest in more than four years.

The central bank concludes its two-day policy meeting on Wednesday, and investors are placing a 98.2% probability it will reveal at 2 p.m. Eastern that it is keeping interest rates unchanged at a range of 5.25% to 5.50%. It is also widely expected to stand pat at the next meeting in January.

Indeed, the market is suggesting that the next move by the Fed will be a cut in rates after its May meeting, and so traders will be keen to see whether the Fed’s forecasts and Chair Jerome Powell’s comments, starting at 2:30 p.m., match that narrative.

U.S. producer prices data for November, which indicate inflationary pressures down the pipeline, will be published beforehand at 8:30 a.m.

The Fed’s outlook will determine investor thinking in the shorter term, and will likely be market moving given the higher levels of optimism which have been building over the last couple of months, according to Richard Hunter, head of markets at Interactive Investor.

“[A]ny mention of potential rate cuts next year would be seized upon, especially since this is not something [to] which the Fed has yet alluded. It has instead maintained that, based on the information before it, the base case remains that rates will remain higher for longer until such as victory can be declared in the fight against inflation,” said Hunter.

However, with core annual inflation, which strips out volatile items such as food and energy, still running at twice the Fed’s 2% target, there is danger the Fed may challenge investors’ rate-cut optimism.

“Our economists believe that Powell will stop short of declaring the tightening cycle as over, likely restating that ‘We are prepared to tighten policy further if it becomes appropriate to do so,’” said Jim Reid, strategist at Deutsche Bank.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, agreed it was likely Powell will look to contain market optimism and rectify the rate cut bets. “If so, we should see correction and consolidation in bond and stock valuations during the final weeks of the year.”

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