Dow futures down over 300 points as losing first half closes and Fed’s favorite inflation gauge looms

What’s driving the markets?

The S&P 500 was on course to takes its losses for 2022 to more than 20%. Since peaking near 4,800 in early January, the U.S. benchmark stock index has crumpled, amid investor fears that surging inflation is battering consumer confidence and damaging the global economy.

Sentiment has also been hit by Russia’s invasion of Ukraine, a move that has heightened geopolitical angst and contributed to sharply rising energy and food prices.

In previous recent episodes of market tantrums, such as the 2020 COVID-19 sell-off, investors could look to central banks for succour. But with inflation in most major economies at their highest level in many decades, monetary guardians like the Federal Reserve are stressing their committment to tighten policy to damp price pressures. Even if that means hurting growth and, consequently, corporate profits.

Federal Reserve Chairman Jerome Powell on Wednesday, said he sees a path back to 2% inflation, but warned there was “no guarantee that we can do that.” while sustaining a strong labor market.

“I do not envision equities recovering until the U.S. rates market is pricing more meaningful cuts from the Fed,” said Stephen Innes, managing partner at SPI Asset Management, in a note to clients.

“Implied Fed pricing has declined over the last few weeks – from a peak of 4% to more like 3.50 %. But that is a ton of rate hike risk for the market to digest,” he said.

Powell will have a sharp eye on data released ahead of the Wall Street opening bell. The PCE core price index for May, due at 8:30 a.m. Eastern Time, is one of the Fed’s favourite price guides and may determine the pace at which the central bank raises interest rates.

Weekly jobless claims numbers and consumer spending reports due at the same time should also give a clue to whether households are suffering from higher inflation and the Fed’s tightening cycle.