Fed decision, banks recover, Xi balks at gas pipeline - what's moving markets

© Reuters.

By Geoffrey Smith

Investing.com -- The Federal Reserve has to decide between price stability and financial stability. Bank stocks recover after Treasury Secretary Janet Yellen's speech, and Xi Jinping leaves Vladimir Putin dangling as Russia looks for new export markets for its gas.

1. Fed faces tricky trade-off; U.K. inflation sends awkward reminder

The Federal Reserve will decide whether or not to continue with raising interest rates, at a time when its previous hikes are taking an increasingly obvious toll on the economy and – just as worryingly – on the financial system.

Market interest rates suggest that the most likely outcome is that the Fed raises the target range for Fed Funds by 25 basis points to 4.75%-5.0%, a more modest hike that seemed likely immediately before the collapse of Silvergate Capital (NYSE:SI), Silicon Valley Bank, and Signature Bank.

Overnight, there was a reminder of how stubborn inflation is limiting the ability of central banks to react more indulgently toward the banking sector. Record food prices pushed the U.K.’s inflation rate back up to 10.4%, making another hike from the Bank of England more likely at its policy meeting on Thursday.

2. Bank stocks recover after Yellen speech

The Fed may be emboldened by signs that the stresses in the U.S. banking sector are easing, at least for now, after Treasury Secretary Janet Yellen promised more help from the government, if necessary.

Regional bank stocks – including First Republic Bank (NYSE:FRC), which has borne the brunt of recent selling and deposit outflows – all rose sharply on Tuesday in response to Yellen’s speech and show little sign of giving up those gains in premarket.

The 2-year Treasury note yield has now risen 50 basis points from its lows earlier this week, suggesting that initial expectations of an early start to a new easing cycle have faded quickly.

3. Stocks in neutral ahead of Fed decision; Nike's clearance sale, Japanese 737 order in focus

The S&P 500, meanwhile, is back where it was in late February, before the hullaballoo over bank stocks even started. Futures contracts are however firmly in neutral territory ahead of the Fed decision, correcting downward only modestly after Tuesday’s rally.

By 06:00 ET (10:00 GMT), Dow Jones futures were down 28 points, or 0.1%, while S&P 500 futures were also down 0.1%, and Nasdaq 100 futures were down 0.3%.

Stocks likely to be in focus later include Nike (NYSE:NKE), which reported an 11% drop in profit as it slashed prices to clear excess inventory in the last quarter. Also in focus will be Alphabet (NASDAQ:GOOGL), after Google started to roll out Bard, the AI function that is its response to Microsoft-backed ChatGPT. Alphabet may also be influenced by testimony on Capitol Hill from ByteDance, which is trying its hardest to stop Congress from expropriating the technology behind TikTok.

Boeing (NYSE:BA) stock is in line for a bid after a big order for its 737 MAX aircraft from Japan Airlines (TYO:9201).

4. Xi leaves Putin dangling on new pipeline project

President Xi Jinping balked at Russian proposals to build a new gas export pipeline leading from Siberia through Mongolia to China, a move that highlighted Russia’s need to find fresh sources of export revenue as it struggles with western sanctions.

Xi refused to comment on the possibility of expanding the so-called “Power of Siberia”, despite comments from Putin suggesting that the talks were all but completed. He also failed to endorse a suggestion from Putin that the countries expand the use of the yuan in clearing international trade with the global south.

However, Xi – as expected - appeared broadly supportive of Russia’s position on Ukraine in statements made after hours of talks with his counterpart Vladimir Putin on Wednesday, joining Putin in criticisms of NATO and the West’s efforts to support Kyiv. The International Monetary Fund agreed to a new $15.6 billion package for Ukraine on Tuesday.

5. Oil's weak rebound capped by U.S. stockpile build

Crude oil prices rebounded weakly as risk assets returned to favor, with another rise in U.S. inventories providing a reminder of the near-term threat to global demand.

The American Petroleum Institute reported a rise of 3.26 million barrels in U.S. crude stocks last week, defying expectations for a drop of over 1 million barrels. Government data are due at 10:30 ET, as usual.

By 06:25 ET, U.S. crude prices were down 0.7% at $69.21 a barrel, while Brent was down 0.4% at $75.02 a barrel.