Copy of 2022-12-30T193134Z_2087481853_RC2IGY972P9C_RTRMADP_3_USA-BONDS-WEEKAHEAD-1673621000648
The Wall Street banks’ earnings reports will be parsed for their commentary around the threat of a recession in the world’s biggest economy. Image Credit: REUTERS

New York: Wall Street equity futures dropped and European stocks pared gains as optimism over less-aggressive rate hikes amid cooling inflation ran into concerns over the weaker outlook for US bank earnings.

S&P 500 and Nasdaq 100 contracts dropped at least 0.9 per cent as traders digested a slew of earnings from major banks. JPMorgan Chase & Co. shares slid 3 per cent in premarket after the largest US lender’s net interest income estimate missed analyst expectations. Bank of America and Wells Fargo & Co. dropped after their earnings reports, while Citigroup pared a decline.

Tesla slumped after slashing prices, dragging shares in other carmakers lower. Delta Air Lines fell after its earnings forecast missed estimates. European stocks gave up most of an advance of as much as 0.6 per cent as the US earnings news weighed on bank shares.

A gauge of dollar strength was steady, while benchmark 10-year Treasury yields rose. Japan’s 10-year bond yield spiked above the Bank of Japan’s 0.5 per cent ceiling amid speculation the BOJ will review the side effects of its ultra-loose monetary policy. The yen extended gains after its 2.5 per cent rally Thursday.

The Federal Reserve is on track to downshift to smaller interest-rate increases after figures Thursday showed a further cooling in inflation. The Wall Street banks’ earnings reports will be parsed for their commentary around the threat of a recession in the world’s biggest economy.

“The more favorable inflation print could allow the Fed to hike by 25 basis points next month rather than the more aggressive hikes it has been using up until now,” Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a note. “But despite this positive outcome, we continue to believe it is too early for an imminent Fed pivot and the conditions are not yet in place for a sustainable equity rally.”

Meanwhile, BofA strategists said US stocks are poised for a fresh slide before ultimately rallying in the second half of the year when economic conditions stabilize. Investors are positioned for the S&P 500 to tumble nearly 10 per cent before rallying by 17 per cent, strategists led by Michael Hartnett wrote in a note.

On Thursday, traders looked past initial disappointment with in-line US consumer price index to focus on the idea that aggressive monetary policy may be gradually achieving its desired results. The swap market is showing less than 50 basis points of tightening priced in for the next two Fed gatherings: a small chance of no move at all in March.

Elsewhere in markets Friday, oil headed for a weekly gain and gold was set for a fourth weekly advance after breaching the $1,900-an-ounce mark in the wake of the release of the US inflation data.