Futures slip as yields rise on bets of higher rates

(Reuters) – U.S. stock index futures slipped on Tuesday as Treasury yields rose to near multi-month highs on increased chances of more interest rate hikes due to elevated inflation and a strong domestic economy.

Wall Street on Monday found some reprieve from the heavy selloff last week that had pushed the major benchmarks to their biggest weekly percentage declines of the year.

The gains, however, were not enough to reverse monthly losses for the three main indexes, with the blue-chip Dow in the red for the year after strong economic data suggested the Federal Reserve could keep interest rates higher for longer.

Traders are beginning to price in the possibility of a bigger 50 basis-point rate hike in March, although the odds remain low at about 23%, according to Fed fund futures, which also suggest rates peaking at 5.4% by September, up from 4.57% now.

The yield on two-year Treasury notes, which track investors’ expectations of the path of interest rates, rose to 4.8%, trading just below a near four-month high hit in the previous session.

“It’s a yield story. Yields are climbing higher in the U.S. and that’s pushing down equity markets,” said Michael Hewson, chief market analyst at CMC Markets.

“We’re talking about stickier inflation in the economy and higher interest rates for longer. Markets still seem to think that we’re going to get rate cuts sometime in the next 12 months and the evidence just does not support that.”

Chicago Fed President Austan Goolsbee, a voter in the rate-setting committee this year, will speak later in the day.

Fed Governor Philip Jefferson said on Monday he was under “no illusion” that inflation would return quickly to the Fed’s 2% target.

At 5:07 a.m. ET, were down 25 points, or 0.08%, were down 4 points, or 0.1%, and were down 18.25 points, or 0.15%.

Zoom Video Communications (NASDAQ:) Inc jumped 6.7% in premarket trading after it forecast annual profit above Wall Street estimates and said it will integrate more artificial intelligence into its products.

Occidental Petroleum Corp (NYSE:) slipped 1% after the oil producer said it would sharply raise spending this year, including on its direct air capture carbon-reduction project, which has been delayed to 2025.

Goldman Sachs Group Inc (NYSE:) inched down 0.1%. Analysts expect the investment bank to unveil its medium-term financial goals at the investor day on Tuesday.