Traders in Wait-and-See Mode Before US CPI, Fed: Markets Wrap

European equities contracts rose slightly, but Asian stocks declined as traders remained cautious ahead of an upcoming US inflation report and the Federal Reserve decision. Hong Kong’s stock market fell over 1%, with auto shares leading the decline in anticipation of Europe’s tariff decision. Japanese stocks also dropped, while Indian gauges were on track to reach new record highs. Euro Stoxx 50 futures saw a 0.3% increase, and US shares contracts remained relatively unchanged after the S&P 500 closed at a new high.

The Bloomberg index of dollar strength continued its upward trend for the fifth consecutive session, hovering close to this year’s high. Treasury yields stabilized after increasing due to a successful $39 billion sale, which led to speculation that Wednesday’s inflation data could support the case for the Fed to lower interest rates this year.
Naomi Fink, a global strategist at Nikko Asset Management, stated that the Federal Reserve needs to be confident that inflation is moving towards its target before considering a rate cut. She believes that more compelling evidence of disinflationary trends may be necessary for the Fed to make a decision. Fink’s firm holds the view that the Fed will implement one rate cut this year.

In other important Asian news, China experienced consumer price gains above zero in May, but factory-gate prices remained in deflation, raising concerns about weak demand. Additionally, the Biden administration is reportedly contemplating additional restrictions on China’s access to chip technology used in artificial intelligence.
According to Charu Chanana, a strategist at Saxo Capital Markets, the China markets are in need of a new catalyst as the impact of previous measures has worn off. It is becoming increasingly challenging for China to announce policy easing as the delay in Fed rate cuts has affected market sentiment. Despite the sustained optimism in the tech sector, there is a slightly cautious tone in the markets due to upcoming event risks such as the US CPI and FOMC announcement today.

In Asia, US monetary policy remains the most crucial factor for traders, even amidst India’s post-election volatility, rate decisions by central banks in Japan and Taiwan, and the testing of key support levels by various Southeast Asian currencies.

The Federal Reserve is expected to maintain borrowing costs at a two-decade high on Wednesday, but there is uncertainty surrounding officials’ quarterly rate projections, also known as the “dot plot.”
According to Nomura strategist Chetan Seth, the upcoming projections could have a significant impact on the market, particularly if they only show one rate cut in 2024 instead of the expected two.

Bloomberg Economics predicts that the new dot plot will indicate two 25-basis-point cuts this year, a decrease from the previous projection of three cuts in March. This adjustment is expected to be supported by the May CPI print, which is likely to show a slowdown in inflation, providing the Federal Reserve with additional reassurance.

In the commodities market, oil prices continued to rise as industry data suggested a decline in US crude stockpiles. Additionally, iron ore experienced a rebound after three days of decline, driven by cautious optimism surrounding China’s property market recovery.