S&P 500 futures cheer lower yields and easing of China fears, despite aggressive Fed rhetoric

• Market sentiment remains slightly positive amid a lightly packed calendar.
• Those responsible for the Fed defend the rate hike citing inflation problems.
• The US diplomatic stance towards China allays geopolitical fears and contributes to cautious optimism.

The risk profile looks positive during the early hours of Thursday, although market activity remains somewhat light.

As for the main catalysts, central bankers, conflicting geopolitical updates and hopes for an economic slowdown dominate the spotlight alongside German inflation, which has risen 8.7% per year in the preliminary reading of January, above the previous 8.6% but below the estimated 8.9%.

On Wednesday, policy makers at the European Central Bank (ECB) and the Federal Reserve (Fed) tried to defend the rate hike and expressed willingness to be more aggressive, citing inflationary fears. Among them, the comments of the governor of the Fed, Christopher Waller, and the head of monetary policy of the ECB, Klaas Knot, stood out. It should be noted, however, that Bank of Canada (BoC) and Bank of Japan (BoJ) officials refrained from joining the hawks and misleading traders.

Separately, US diplomats also highlighted concerns that advocate for the Fed’s higher rates and defy risk-seekers. US Treasury Secretary Janet Yellen said: “While inflation remained elevated, there were encouraging signs that supply-demand mismatches were easing in many sectors of the economy.” On the other hand, US President Joe Biden stated during an interview on PBS that there will be no recession in the US in 2023 or 2024.

In another order of things, the easing of fears regarding the tension between the US and China due to the collapse of the globe seems to have combined with the absence of significant negative factors in other areas to underpin a slightly positive mood.

Against this backdrop, 10-year US Treasury yields pulled back from a one-month high to break a three-day uptrend on Wednesday, pressured around 3.61% at most. The same helped SP500 futures ignore Wall Street’s bearish close and remain slightly bullish in recent hours.

In the coming hours, hawkish central bank bias, inflation fears and growth talk could entertain market traders amid a lack of major data/events. We will also have to be attentive to the weekly requests for US unemployment benefits.