The futures markets are trading unevenly, and are the U.S. equity futures are mixed as we head into the Wednesday session.
The release of the Producer Price Index (PPI), which represents a final portion of data ahead of the Fed meeting later today, showed some ebbing inflationary pressures. Headline producer prices were down 0.3% in May (or up 1.1% year over year), while core producer prices, which exclude volatile food and energy prices, were up 0.2% in May (or up 2.8% year over year). The indices didn’t move too move after this release, suggesting a strong start for most of the market.
All eyes will be on the Federal Reserve Open Market Committee (FOMC) meeting later today, when the central bank will release its interest-rate policy decision. Most traders expect interest rates to remain between 5.00%-5.25%, and the odds of any increase fell sharply after the release of the Consumer Price Index numbers yesterday. Still, investors will likely pay close attention to the press conference after the decision is announced, which should give further insight into future interest rate policy. Traders are currently pricing in an interest rate hike at the July 26th meeting. However, any new information could change this forecast.
The Consumer Price Index (CPI) report was released yesterday. Headline inflation was up 4.0% year over year (compared with an annualized 4.9% increase in April). Core inflation, which excludes volatile food and energy prices, was up 5.3% year over year, easing from 5.5% in April. Increasing shelter costs made up the biggest portion of the monthly increase, followed by used car prices and vehicle insurance. Traders believe the inflationary slowdown will cause the Fed to be more accommodative in its fiscal policy, supporting stock prices.
The stock market started positively yesterday, buoyed by data showing lessening inflation. Overall, the S&P 500 finished up 30 points (up. 0.69%), the NASDAQ rose 111 points (up 0.83%), and the Dow Jones Industrial Average climbed 146 points (up 0.43%). Market breadth was quite positive, with advancers outpacing decliners by a 2.3-to-1.0 ratio. Materials stocks were among the best performers, while utilities equities were among the weakest. That said, the latter was the only sector that finished in the red yesterday.
In commodity news, oil prices rose yesterday, as traders have believed that a cut in interest rates in China would help spur demand, and Saudi Arabia announced a one million barrel production reduction last week. Elsewhere, U.S. Treasury bond yields were mixed as short-term rates rose and long-term rates fell. The yield curve remains heavily inverted, with short-term rates trading well above long-term ones, which usually portends a recession. The Chicago Board Options Exchange Volatility Index, or VIX, also known as the fear index, was down yesterday as traders purchased less options protection.
Plenty of economic data will be released in the coming days. These include U.S. retail sales, the Bureau of Labor Statistics Import Price Index, and the Empire State and Philadelphia Fed Manufacturing Surveys for May on Thursday. The University of Michigan's consumer sentiment index is on the docket for Friday. On the earnings front, several earnings reports from mostly smaller companies will be released in the days ahead. All told, we think all eyes will be on economic data and the state of the economy. – John E. Seibert III
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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