Wall Street is being dealt a double feature of economic news on Wednesday, when an inflation report is due in the morning and the Federal Reserve is expected to announce what it will do with its key interest rate in the afternoon.
What to expect: Investors will parse the May Consumer Price Index report on Wednesday morning, just hours before the Fed is slated to announce its monetary policy update. The CPI report and Fed's policy meeting have fallen on the same day just seven times since 2014, according to Bank of America. Despite the rare event, it's unlikely the stock market will swing widely because of the economic two-fer, some investors say.
"The things that could drive volatility higher would be if Chair Powell was to say something unexpected; I think that is of a very low probability," wrote Dave Sekera, chief US market strategist at Morningstar, in a Monday note. But if "inflation metrics come out much higher than expected, that could lead to a small sell-off. How much the market sells off would depend on how much above consensus inflation is running."
The central bank is widely expected to keep rates on hold this month. Some analysts say the upcoming CPI data won't change the Fed's June decision (when no change in rates is also expected), unless it shows a huge deceleration or acceleration in inflation. But the metric will still help guide the Fed's decisions during the second half of the year.
"The number of rate cuts the Fed will actually be able to deliver this year will depend heavily on the outlook for inflation; if it remains stickier, investors may want to temper their expectations for easing for 2024," wrote Glenmede's investment strategy team in a Monday note.
Inflation is coming down, but the path could be bumpy. Inflation showed signs of cooling in April after staying worryingly warm during the first quarter of this year. There are also signs that Americans are spending less: A second estimate of gross domestic product, released in May, showed that consumer spending was weaker in the first three months of the year than initially reported. Big-box retailers are cutting prices to entice price-conscious consumers.
Investors are looking to the May CPI for clues about whether that cooldown in April's CPI report was a blip. Already, other metrics have suggested that inflation is still taking its time to come down. The April Personal Consumption Expenditures index, the central bank's preferred inflation gauge, showed the US economy made little progress keeping costs in check. US home prices are at record highs. Prices for used and new cars are still running hot, as are costs for insuring, repairing and maintaining them.
The latest jobs report released Friday revealed that the US economy added an eye-popping 272,000 jobs in May. The combination of persistent inflation and strong job growth has led Wall Street to pare its expectations for rate cuts this year. Traders are expecting just one to two cuts in 2024, according to the CME FedWatch Tool.
The Fed on Wednesday will release its latest projections for where it expects rates to head in the future, and, importantly, how many times it expects to ease rates in 2024. Although the central bank has stuck to its forecast for three rate cuts so far this year, that could change — and potentially become the final set of 2024 projections.
"If most of the [Federal Open Market Committee] participants assume only one 25 [basis point] rate cut this year is appropriate, there would appear to be little chance of sufficient data in time to pull them back into a July or September rate cut," wrote UBS economists in a Friday note.
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