S&P 500 Futures, yields portray cautious optimism ahead of US inflation

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  • Market sentiment improves amid hopes of softer US inflation, mixed headlines from Russia, China.
  • S&P 500 Futures pares the biggest daily loss in a week, US 10-year Treasury yields struggle after two-day downtrend.
  • Fedspeak keeps promoting higher rates but inflation forecasts, expectations appear helping optimists.
  • China reports slight in dip in covid cases, US government gridlock looms.

Risk appetite remains sluggish, slightly positive, as traders await the key US inflation data during early Thursday. Mixed headlines surrounding the key risk catalysts and the latest Fedspeak also challenge the sentiment of late.

While portraying the mood, S&P 500 Futures print 0.20% intraday gains near 3,765, after dropping the most in a week, whereas the US 10-year Treasury yields pause the two-day downtrend near 4.10% at the latest. It’s worth noting that the US two-year bond coupons print the first daily gains, so far, in three around 4.60%.

Recently, Minneapolis Federal Reserve (Fed) President Neel Kashkari stated, “We will do what we need to do to bring inflation back down.” However, New York Federal Reserve (Fed) President John Williams previously mentioned that the relatively stable long-term inflation expectations are good news. On the same line, Richmond Fed President Thomas Barkin also mentioned that the Fed’s fight against inflation may lead to a downturn in the US economy but that is a risk that the Fed will have to take.

It should be noted that the softer inflation expectations also underpin the market’s cautious optimism. That said, the US inflation expectations per the 5-year breakeven inflation rates per the St. Louis Federal Reserve (FRED) data, dropped to the lowest levels since October 20, to 2.53% versus 2.61% prior. Even so, a bit broader inflation expectations, however, remained a bit less weak as the 10-year breakeven inflation rates per the St. Louis Federal Reserve (FRED) data slid to 2.42% while refreshing the weekly low.

Elsewhere, headlines surrounding Russia also seemed to have favored the latest cautious optimism as Russia appears to retreat from the only Ukrainian regional capital captured, namely Kherson, whereas President Vladimir Putin is less likely to attend the upcoming G-20 summit in Bali, starting from November 15.

It should be noted that a slight reduction in China’s daily covid numbers, from 1,294 to 1,133 in Mainland, join the receding hopes of Democrats to gain major power share in the US midterm elections to help favor the optimists.

However, a lack of data/events and a light calendar, not to forget indecision over the Fed’s next moves, keeps the traders on their toes ahead of the key US Consumer Price Index (CPI) for October. Market consensus suggests that the headlines US CPI will ease to 8.0% YoY from 8.2% prior while the more important Core CPI may remain mostly unchanged near 6.5%, compared to 6.6% previous readings, during October.

Also read: US October CPI Preview: US Dollar to weaken on a CPI-inspired risk rally