Navigating the Shifting Tides: US Stocks Bounce Back Amid Inflation and Earnings Scrutiny

US stock index futures rebounded on Tuesday, recovering from the previous session's selloff, as investors shifted their focus to key inflation data and third-quarter earnings reports expected later this week. The market's attention is centered on gaining fresh insights into the Federal Reserve's interest rate trajectory.

Volatility Persists Amid Economic Uncertainty

Equities Respond to Shifting Yields and Geopolitical Tensions

The major US indexes closed around 1% lower on Monday, weighed down by a surge in Treasury yields, concerns about the impact of rising conflict in the Middle East, and a reassessment of US rate expectations. The S&P 500 E-minis, Nasdaq 100 E-minis, and Dow E-minis all showed signs of recovery on Tuesday, with gains ranging from 0.14% to 0.44%.

Inflation and Fed Policy Remain in Focus

US Treasury yields retreated slightly from Monday's highs, but the benchmark 10-year note yield remained above 4%, as strong economic data last week prompted investors to trim bets on the scope of the Federal Reserve's interest rate cuts for the rest of the year. Traders have priced in a nearly 89% chance of a 25-basis-point rate cut from the Fed at its November meeting, while bets on no rate change also increased slightly.

Volatility Index Reflects Market Uncertainty

The CBOE Volatility Index, Wall Street's "fear gauge," retreated from Monday's highs but remained elevated, trading around a one-month high at 22.04. This reflects the ongoing market uncertainty and the potential for further volatility.

Earnings Season Begins with Mixed Results

PepsiCo, the packaged food giant, reported a surprise drop in third-quarter revenue and cut its forecast for annual sales growth, causing its stock to lose around 1%. However, the S&P 500 is expected to report a 3.2% year-over-year earnings per share (EPS) rise in the third quarter, with gains for six of its 11 sectors, according to CFRA Research.

Fed Officials Weigh in on Rate Outlook

Fed Governor Adriana Kugler expressed support for further interest rate cuts if inflation continues to ease, as she expects. Other Fed officials, including John Williams and Alberto Musalem, had previously suggested that it would be appropriate to reduce rates over time.

International Trade and Hurricane Milton in Focus

Investors were also monitoring the release of August's international trade balance data and the potential impacts of Category 4 Hurricane Milton on the markets.

Chinese Stocks Slide, European Markets Dip

US-listed shares of Chinese companies declined, tracking losses in domestic stocks, as optimism over China's stimulus measures waned due to the absence of more specific details. European shares also dipped, with China-sensitive mining and luxury companies among the biggest losers, although they later rebounded somewhat.

Oil Prices Fluctuate, Yields Remain Elevated

Oil prices fell back after jumping on Monday due to the widening conflict in the Middle East and concerns about supply disruptions. Benchmark 10-year US government bond yields hovered above the 4% level, as traders reassessed the pace of Fed rate cuts in light of the strong US jobs report.

Currency and Commodity Markets React to Developments

The dollar weakened against the Japanese yen, while the euro gained slightly against the US currency. Copper prices fell to their lowest in two weeks as metals markets reacted to the lack of detail on China's stimulus measures.