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Dow futures sink over 300 points as investors process Fed policy and lackluster economic reports

U.S. stock-index futures pointed to sharp losses early Thursday as investors processed the Federal Reserve’s economic outlook and its decision to hold benchmark interest rates at superlow levels for at least the next three years.

A round of less-than-stellar U.S. economic reports early Thursday, including jobless benefit claims, manufacturing activity, and housing may also raise the bar for bullishness on Wall Street.

How are equity benchmarks performing?

Futures for the Dow Jones Industrial Average
YM00,
-1.33%

YMU20,
-1.33%
 were off 315 points, or 1.1%, at 27,620, those for the S&P 500 index
ES00,
-1.72%

ESU20,
-1.72%
 were down 51.40 points at 3,327.75, a decline of 1.5%. Nasdaq-100 futures
NQU20,
-2.47%

NQ00,
-2.47%
 were retreating 255.50 points, or 2.3%, to reach 10,997.50.

On Wednesday, the Dow
DJIA,
+0.13%
 added 36.78 points, or 0.1%, to finish at 28,032.38, while the S&P 500 index
SPX,
-0.46%
 shed 15.71 points, or 0.5%, closing at 3,385.49. The Nasdaq Composite Index
COMP,
-1.25%
fell 139.85 points, or 1.3%. The Russell 2000 index
RUT,
+0.92%
 of small-capitalization companies, rose 14.18 points, or 0.9%, to close at 1,552.33.

What’s driving the market?

Weak U.S. economic data amid the coronavirus pandemic and uncertainty about the Fed’s new policy stance in the near-term was creating some friction for stock buying early Thursday.

A day after the Fed released its most recent policy update and kept its benchmark interest rate at a range between 0% and 0.25%, some investors believe that the U.S. central bank Chairman Jerome Powell may have unsettled the stock market by emphasizing the challenges that the U.S. economy faces as it attempts to emerge from recession brought on by the coronavirus pandemic.

The Fed said it expected interest rates would stay near zero until at least 2023 but signaled that the road ahead for the economy could be a long one, despite the run-up in equity values this year, as the U.S. is still dealing with millions of people who are unemployed.

The Fed’s meeting was the first since officials last month announced a new policy framework that focused on average-inflation targeting, allowing for inflation to rise above its prior 2% annual target or fall below, before making interest-rate moves.

“We attribute the risk reversal on the day to the lack of matching stronger guidance on [quantitative easing] where the Committee preferred to retain flexibility, plus a still too vague formulation on overshooting, concerns about fiscal and some misunderstandings / slight communication missteps,” wrote Evercore ISI analysts Krishna Gua and Ernie Tedeschi in a research note.

That said, the analysts view the overall tone of the Fed’s Wednesday statement and Powell’s news conference as positive for bullish investors.

“It is proof the Fed reaction function has changed. And it is bull fuel for the longer run,” the Evercore analysts said.

Among other central banks, the Bank of Japan, kept its policy steady at the conclusion of its gathering, while the Bank of England on Thursday left interest rates unchanged, as expected, but statements suggested that it had explored negative rates.

On U.S. fiscal policy, the prospects for another coronavirus aid package remain confused after Senate Republicans were unmoved Thursday by Trump’s call for more spending.

Market participants also watched a reading of the health of the labor market, with weekly, initial jobless benefit claims showing that 860,000 Americans filed for unemployment benefits, better than the estimated 870,000, with continuing claims at 12.63 million, but still reflecting very elevated unemployment levels.

Separately, a reading of the manufacturing activity in the Philadelphia area, the Philadelphia Fed manufacturing index, fell to 15 in September from 17.2 in prior month, suggesting a slowing pace of the recovery from the COVID-19 pandemic.

In other U.S. economic reports, U.S. home builders started construction on homes at a seasonally-adjusted annual rate of 1.42 million in August, representing a 5% decrease from the previous month but a 3% uptick from a year ago, the U.S. Census Bureau reported Thursday.

Meanwhile, conflicting statements by the director of the U.S. Centers for Disease Control and Prevention, Robert Redfield, who said a vaccine would be in “very limited supply” at the end of the year and President Trump, who claimed one would be ready for immediate use by the general public soon, could also be causing some downward momentum in equities.

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