Stock futures are down as traders mull prospects of higher rates

Stock futures were down Tuesday as concern over higher rates lingered among traders awaiting comments from a closely followed Federal Reserve leader.

Futures tied to the Dow Jones Industrial Average shed 130 points, or 0.4%. S&P 500 futures fell also fell 0.4%, while Nasdaq-100 futures dropped 0.6%.

Atlanta Fed President Raphael Bostic said Monday that interest rates should rise above 5% and stay there for a “long time.” Meanwhile, San Francisco Fed President Mary Daly said the central bank should continue raising rates, albeit at a slower pace. Treasury yields rose slightly on Tuesday.

Those comments came ahead of a speech by Fed Chair Jerome Powell slated for 9 a.m. ET Tuesday. Investors will parse his comments for tea leaves into how the Fed will respond next in its attempt to cool inflation.

Investors came into the new year worried that higher Fed rates could tip the economy into a recession. However, many appear to be mounting bets that inflation is starting to ease.

The Nasdaq Composite on Wednesday posted a 0.6% gain, helped by a 6% rally in Tesla. Meanwhile, the Dow erased a 304-point gain and ended down almost 113 points, while the S&P fell 0.1%.

Monday also marked the end of the first five trading days of 2023, during which the S&P 500 gained 1.1%. According to a classic stock market indicator, that kind of early strength could bode well for the rest of the year.

Tom Lee of Fundstrat called it a “strong omen” and said the market is set up for a 20% rally this year.

The Fed wants financial conditions “to stay tight,” Lee said on CNBC’s “Closing Bell: Overtime.” “Dollar, stocks, bonds – everything’s kind of easing so they’re probably a little worried and they want to be sure inflation is in fact dead. But one of the changes especially since October is that inflation has been under shooting.”

Depending on how CPI data fares Thursday, the bond market could push the Fed to make February the last rate hike before cuts, Lee added. Investors will also watch Friday for big bank earnings and consumer sentiment data.