On Wednesday, U.S. equity futures exhibited a slight upward trend, indicating that investors were preparing for the release of the May inflation report just prior to the Federal Reserve’s decision on interest rates in June. While the consensus doesn’t anticipate any alterations to the Fed’s benchmark lending rate, which presently stands at a two-decade high ranging from 5.25% to 5.5%, the focus is on the updated growth and inflation projections published by the Fed officials each quarter.
These forecasts play a crucial role in the formation of the so-called Dot Plots, offering a summary of officials’ perspectives on Fed rates in the coming year and beyond. The last set of Dot Plots, issued in March, indicated expectations for three quarter-point rate reductions throughout the year.
However, a series of inflation reports that have exceeded expectations since then, along with a resilient labor market and a robust economy, are likely to prompt a reassessment of these forecasts. Today’s May Consumer Price Index (CPI) update is particularly significant, as it will heavily influence the Fed’s decision-making process.
“We expect the longer run fed funds rate will be revised higher, along with the end-of-year rate as rates will likely remain higher for longer,” remarked Jeffrey Roach, chief economist for LPL Financial in Charlotte. He suggested that although inflation is moderating, the Fed is prepared to initiate rate cuts this year, albeit at a pace that may not fully satisfy investors.
Forecasts suggest that the headline CPI reading is expected to remain steady at an annual rate of 3.4%, but ease to 0.1% compared to April levels. Core inflation, which excludes volatile food and energy prices, is anticipated to decrease to 3.5% year-on-year and remain at 0.3% month-on-month.
Ahead of the release of the CPI report at 8:30 am Eastern time, Treasury yields remained stable. Benchmark 10-year note yields were trading at 4.402%, while 2-year notes were pegged at 4.83%. Wall Street futures indicated a modestly firmer opening, with S&P 500 futures pointing to a 6 point advance, Dow Jones futures suggesting a 20 point gain, and Nasdaq futures indicating a 26 point increase.
Several stocks garnered attention, including Oracle (ORCL), which surged 8.6% following a mixed fourth quarter earnings report, offset by a new cloud deal with Google (GOOG) and OpenAI. Apple (AAPL), which saw a significant increase in market value yesterday with the release of its new AI toolkit, experienced a 0.38% decline in premarket trading. Broadcom (AVGO) was up 1.6% ahead of its second quarter earnings release after the closing bell.
In European markets, the Stoxx 600 in Frankfurt rose by 0.46%, while Britain’s FTSE 100 climbed 0.69% in mid-day London trading. In Asia, the Nikkei 225 slipped by 0.66%, while the MSCI ex-Japan benchmark gained 0.24% ahead of today’s significant economic events.