S&P 500 futures rise on optimism economy can handle higher rates

(Bloomberg) — U.S. stock-index futures rose, indicating equities will extend their rally, as signs of a stronger economy spurred speculation it can withstand higher interest rates.

Contracts on the S&P 500 expiring in June gained 0.4 percent to 2,083.75 at 8:32 a.m. in New York. The underlying index rose the most in more than two months on Tuesday, after a surge in home sales made investors more comfortable with the prospect of higher borrowing costs. Futures on the Dow Jones Industrial Average added 70 points, or 0.4 percent, to 17,757 today.

Hawkish commentary from Federal Reserve officials on the back of last week’s policy-meeting minutes, along with improving economic figures, led to speculation the central bank may increase rates as early as June. Data today are forecast to point to an improvement in the services industry. Releases on consumer sentiment and gross domestic product are due later this week, and Fed Chair Janet Yellen is scheduled to speak on Friday.

“Everything seems to show people should be more confident,” said John Plassard, a senior equity-sales trader at Mirabaud Securities in Geneva. “The housing data added to better employment and inflation figures, and it was the third set of data showing the Fed is ready to hike. If they hike, it means the economy is indeed doing better so it wouldn’t leave people disappointed.”

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Higher interest rates could reduce the market price of the notes, bonds and other fixed-income securities in insurance companies’ investment portfolios, but higher rates would increase the yields insurers could get over the entire life of the securities.

Insurers have predicted that modest increases in interest rates could lead to dramatic improvements in the profitability of blocks of long-term care insurance (LTCI) business, disability insurance business and other products designed to pay benefits over a long period of time.

Traders are now pricing in a better than one-in-three chance of a rate increase in June, from 4 percent at the start of last week. Their bets for a July move have jumped to 54 percent from 19 percent.

Equities are breaking out of a torpor that’s left markets struggling for direction as investors sought more clarity on the Fed’s rate intentions. The S&P 500 has alternated between daily gains and losses for the past seven sessions, trading in a range of less than 50 points in May. In Tuesday’s rally, investors favored this year’s worst-performing groups, with health care and financial companies trimming 2016 losses to less than 2.6 percent while technology shares erased a drop that had reached nearly 12 percent.

After surging 15 percent from a 22-month low in February, stocks ran out of steam in late April amid mixed earnings reports and signs of lukewarm growth. The S&P 500 closed on yesterday 2.6 percent away from the record it reached last year.