U.S. equity futures moved lower on Tuesday as investors returned from the Labor Day holiday facing another surge in oil prices, escalating tensions in the Middle East and renewed uncertainty over the Federal Reserve’s next interest-rate decision.
Crude prices provided a major source of pressure, with U.S. oil futures climbing nearly 2% following another escalation between Washington and Tehran.
The United States struck three Iranian crude oil carriers over the weekend after Iran fired ballistic missiles towards two U.S. Navy warships operating in regional waters.
Iran subsequently warned that further attacks on its assets would trigger retaliation. Saudi-led coalition forces also pledged a firm response following a wave of attacks by Houthi forces.
At the same time, Tehran said an agreement with Oman concerning shipping arrangements through the Strait of Hormuz was imminent. Investors nevertheless remained concerned about the possibility of further disruption along the strategically important energy corridor.
Strong Jobs Report Revives Fed Rate-Hike Expectations
The weaker futures performance also followed Friday’s unexpectedly strong U.S. employment figures, which prompted investors to increase expectations for another Federal Reserve rate rise.
Nonfarm payrolls increased by 162,000 in August, comfortably exceeding forecasts for 55,000 new jobs. July’s employment figure was revised to a gain of 21,000 from the initially reported loss of 23,000.
The stronger labour market data pushed Treasury yields higher as traders considered whether the Fed could have more room to tighten monetary policy while attempting to bring persistent inflation under control.
The CME Group FedWatch Tool showed the probability of a quarter-point rate increase at 58.4%, after the implied likelihood had fallen below 50% on Thursday.
Charlie Ripley, Senior Investment Strategist at Allianz Investment Management, said: “While today’s labor report shifted September hike expectations sharply, the outcome is not a sure bet and additional signals that confirm inflation has peaked will make the Fed’s decision to hike even tougher at the September meeting.”
Inflation Reports Could Shape September Fed Decision
Attention is now shifting towards U.S. consumer and producer inflation reports due later in the week.
The figures could prove important for expectations ahead of the Fed’s next monetary policy meeting, particularly after the employment report revived speculation about another increase in borrowing costs.
Higher oil prices could further complicate the outlook by adding to energy-driven inflation pressures just as policymakers assess whether underlying price growth is cooling sufficiently.
Wall Street Pulled Back on Friday
U.S. stocks finished lower on Friday after gaining strongly over the previous two sessions.
The Dow Jones Industrial Average declined 271.86 points, or 0.5%, to 53,414.25. The Nasdaq Composite fell 77.07 points, or 0.3%, to 26,506.99, while the S&P 500 dropped 29.11 points, or 0.4%, to 7,718.60.
Weekly performance was more resilient. The Dow declined 0.3%, but the S&P 500 edged 0.1% higher and the Nasdaq gained 0.4%.
Semiconductor Strength Helps Offset Sector Weakness
Friday’s session produced sharp differences between individual sectors.
Software stocks reversed some of their previous session’s gains, sending the Dow Jones U.S. Software Index down 2.2%.
Gold-related shares also weakened as bullion prices declined, with the NYSE Arca Gold Bugs Index falling 1.8%. Pharmaceutical and biotechnology shares were among the other notable laggards.
Semiconductors were a major exception. The Philadelphia Semiconductor Index surged 3.4%, while computer hardware and airline shares also recorded strong gains and helped contain the broader market decline.
With Middle East tensions supporting oil prices and important inflation figures approaching, the interaction between energy costs, Treasury yields and Federal Reserve expectations is likely to remain a key driver for Wall Street.
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