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

The action on Wednesday was choppy, leaving the CBOE Volatility Index VIX, +6.18% — a guage of expected equity market volatility — elevated at 28.2, compared to its long run average around 20.

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.

Read: What’s next for the stock market after the worst 1st half since 1970? Here’s the history.

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.

The yield on the US 10-year Treasury TMUBMUSD10Y, 3.037% was down 5 basis points to 3.053%, reflecting a move into perceived havens. Deteriorating risk apetite has pushed bitcoin BTCUSD, -5.47% back below $20,000, where it was trading on Thursday.

Adding to trader anxiety is the second quarter company earnings season, which will kick into gear in the next few weeks. Recent reports from consumer-facing companies — such as Bed Bath & Beyond BBBY, -23.58% — have been poorly received.

Better news emerged from Asia, where a survey of China’s manufacturing sector registered expansion for the first time since March after COVID-19 restrictions were eased. The Shanghai Composite SHCOMP, +1.10% rallied 1.1% in response.

The mood in Europe was cautious as traders tracked the fall in U.S. futures, with the Stoxx 600 SXXP, -1.99% shedding 1.5%.