FOMC and CPI Preview: Why the inflation reaction will be short-lived

Cryptocurrencies dipped Tuesday while US equities posted mixed returns midway through Tuesday’s session as investors awaited inflation data and an update from the Federal Reserve.

Bitcoin and ether were each trading around 4% lower over 24 hours at time of publication, according to Coinbase. Bitcoin hovered around $66,900 after briefly breaching the $70,000 level Monday.

The S&P 500 and Nasdaq Composite indexes were mostly flat, losing 0.2% and gaining 0.15%, respectively, at time of publication.

Federal Open Market Committee members gathered Tuesday morning for the first day of their two-day policy setting meeting. Central bankers are expected to release their interest rate decision and projections Wednesday at 2 pm ET. Investors banking on a return in equities this week may be disappointed, analysts say.

“From 1994 to 2011, the S&P 500’s entire return came during FOMC meeting weeks,” Nicholas Colas, co-founder of DataTrek Research, wrote in a note Tuesday. “This ‘Fed Drift’ has waned in the 2020s. Over the last 18 months, the S&P’s win-rate from Tuesday – Thursday of a Fed week is only 45%.”

The US Bureau of Labor Statistics is also slated to release the latest Consumer Price Index (CPI) report Wednesday morning. Analysts from JPMorgan are calling for May’s month-over-month figure to show around a 0.3% increase in prices, which should have minimal impact on markets.

UBS analysts are similarly expecting the yearly inflation figure to come in similar to the last read of 3.4% recorded in April, which should be enough to convince investors that prices are in fact trending lower.

The CPI report is “still one of the most important monthly economic reports because the Fed can’t cut until there’s more progress on falling inflation; its impact will be lessened by the fact the Fed meeting is just a few hours later,” Tom Essaye, founder of Sevens Report Research, said.

The market will digest CPI figures as it typically does, Essaye predicts, with a lower-than-expected inflation read sending prices higher and a higher inflation print sending prices lower. But, the report’s impact will be short-lived since the Fed will reveal their plans before markets close.

“That said, it’s still an important medium-term indicator because regardless of the short-term influence tomorrow, the reality is the Fed can’t cut rates in earnest until core CPI is much closer to its 2% target, so any evidence that the decline has resumed will be positive, while still-sticky inflation will be a medium-term negative,” Essaye said.

To read more about what to expect on Wednesday, subscribe to Blockworks’ latest newsletter, On the Margin, here.

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