The S&P 500 is trading around the same point it was at on May 9, and the action on Tuesday was the narrowest trading range since November 11, 2021, according to Bespoke Investment Group. Sentiment has been mixed with concerns about the debt ceiling and economic issues, while there have been some pretty good earnings reports that are creating a little fear of being left out of a sudden rally.
It is a good setup for a big move as new economic news hits, and on Wednesday morning, the CPI report will be grabbing attention.
It is expected that CPI rose 5% in April from a year ago, which is unchanged from the previous report for March. This report is of particular importance because it will highlight the battle between the market, which expects significant rate cuts later in the year, and the Fed, which is maintaining a hawkish posture and indicating that rate cuts are unlikely.
A softer-than-expected CPI report will help to cement the likelihood of a Fed pause, but the problem now is that a soft CPI report may also be viewed as a leading indicator of slowing growth and a potential recession.
If CPI is hotter than expected, it will likely produce a very sharp response because of the market expectations of a dovish Fed pivot. The market has embraced the idea that inflation is already well under control, and that will allow the Fed to pause, but if that thinking is called into question, it is going to be a surprise.
In addition to CPI, there is much talk about the debt ceiling issue. There was no progress at a White House meeting yesterday, but that isn't very surprising. The great likelihood is that this will come down to the wire before any real progress is made. The market isn't too worried yet, but the closer a deadline becomes, the more volatility there will be.
The very flat technical action sets up conditions for a strong response to news flow but watch for whipsaws. The CPI report is no longer as simple as lower is better. Market concerns continue to shift to worries about growth, and we have to view all data through that lens at this point.
We have a little nervousness in the early going. The CPI report hits at 8.30 am ET.