Fed Meeting in Focus as Chinese Factory Data Disappoints – Market Movements Explained

U.S. stock futures showed mixed results on Tuesday as investors prepared for the Federal Reserve’s key policy meeting later in the week. Meanwhile, economic indicator Caterpillar is scheduled to announce its latest quarterly earnings, although hopes for a rebound in Chinese growth were dampened by disappointing manufacturing data.

1. Mixed Futures Ahead of Fed Meeting

On Tuesday, U.S. stock futures oscillated as investors braced for the beginning of a two-day Federal Reserve policy meeting, reflecting on a relief rally from the prior session.

By 5:57 AM ET, the Dow futures had risen by 111 points, or 0.3%, while S&P 500 futures were up 7 points, or 0.2%, and Nasdaq futures were largely unchanged.

The main indices on Wall Street concluded Monday on a positive note, with the benchmark index achieving a 1.2% increase—the largest single-day gain since late August. The Dow and tech-heavy Nasdaq also registered gains of 1.6% and 1.2%, respectively.

Despite this slight uptick from recent declines, the major averages appear set to close out October in the negative, as the month winds down.

2. Highlights of a Busy Fed Week

The Federal Open Market Committee is set to begin its two-day meeting today, marking the highlight of a week filled with corporate earnings reports and significant economic data.

Policymakers are largely expected to maintain the Fed funds target rate at its current level of 5.25% to 5.5% when they announce their decision on Wednesday. Market attention will likely center on the accompanying policy statement and remarks from Fed Chair Jerome Powell, as investors seek insight into future interest rate movements.

Powell has previously emphasized the complexities surrounding the central bank’s key aim of managing inflation, aiming to do so without imposing tightening measures that might derail the U.S. economy. Rising Treasury yields, unexpectedly strong economic data, and escalating tensions in the Middle East are among the factors officials must consider.

Additionally, other central banks are also expected to make policy announcements this week. The Bank of Japan is anticipated to maintain ultra-low interest rates while slightly adjusting its language regarding yield curve control. The Bank of England’s latest rate decision will be revealed on Thursday.

3. Earnings Reports from Caterpillar and Pfizer

Caterpillar and Pfizer are set to present their quarterly earnings on Tuesday.

Caterpillar, the leading manufacturer of construction and mining equipment, had forecasted in August that its full-year operating margin would be at the upper end of its guidance range due to strong demand for heavy machinery. However, analysts have raised concerns that increasing mortgage rates might hamper spending in residential construction, a significant segment of Caterpillar’s business.

For Pfizer, the third-quarter earnings come shortly after the company reduced its annual revenue forecast by 13% due to lower-than-expected sales for its COVID-19 vaccines and therapies. A decline in post-pandemic vaccination rates, coupled with increased population immunity, has diminished the previously high demand for its COVID vaccine, which had driven record revenues in 2021 and 2022.

Today’s earnings schedule also includes reports from chipmaker Advanced Micro Devices and Caesars Entertainment.

4. Decline in Chinese Manufacturing Activity

Chinese manufacturing activity unexpectedly contracted in October, dampening hopes for a recovery in the second-largest global economy. Domestic businesses are facing mounting challenges due to dwindling local and international demand.

The manufacturing purchasing managers’ index (PMI) registered at 49.5 in October, indicating contraction, as a reading below 50 signifies a decline. This outcome fell short of expectations for steady growth at 50.2, posing a setback for Chinese officials who are under increasing pressure to implement measures to revive the sluggish post-COVID economy.

China’s manufacturing PMI has now contracted in six out of the ten months in 2023.

5. Oil Prices Recover from Previous Decline

Oil prices showed a slight uptick on Tuesday, recovering after a significant drop, although gains remained limited due to concerns about diminishing fuel demand in leading crude importer China, further worsened by weaker factory activity data.

As of 5:59 AM ET, crude futures were up by 0.7% to $82.92 a barrel, while Brent crude gained 0.7% to reach $86.92 per barrel.

The market had seen nearly a 3% decline on Monday as traders opted to secure recent profits ahead of a week filled with crucial economic events, particularly the Fed’s interest rate decision on Wednesday.

Tensions in the Middle East continue to be a focus, with traders wary of the ongoing conflict potentially escalating into a broader crisis in this oil-rich region.