Stock futures rise as traders bet data to show cooling inflation

What’s driving markets

Stock index futures were higher, while Treasury yields and the dollar were lower as investors expressed hope that data on Wednesday will show U.S. inflation at its slowest pace in more than two years.

The consumer price index for June will be published at 8:30 a.m. Eastern. Economists polled by The Wall Street Journal expect headline year-on-year inflation to fall from 4.0% in May to 3.1% and year-on-year core inflation, which strips out volatile items like food and energy, to slow from 5.3% to 5.0%.

Confirmation that inflation has dropped to its lowest since March 2021 — down from a multi-decade peak of 9.1% just over a year ago — will encourage investors to believe the end of the Federal Reserve’s rate hiking campaign in in sight, potentially providing an additional boost for stocks.

“CPI comes out at an important crossroads for the Fed. A hike in July is pretty much nailed on but after that it’s all to play for,” said Jim Reid, strategist at Deutsche Bank.

Stephen Innes, managing partner at SPI Asset Management said: “Investors appear to be positioning for another decline in both core and headline –reflecting continued moderation in shelter inflation, lower used car prices, and slower non-housing services inflation. The key question is whether the data will beat consensus expectations and cause the Fed to take notice.”

The S&P 500 sits just shy of 15-month highs having risen 15.6% so far in 2023, but Tom Lee, head of research at Fundstrat, reckons that the S&P 500 could swiftly rally 100 points, or possibly significantly more, if the month-on-month core inflation data is notably softer than expected.

“A June Core CPI positive print (+0.20% or less) would strengthen the
case for stocks in [the] second half…We still believe the highest probability is a large rally this week. And as we noted.. on the October 2022 and February 2023 CPI prints, the S&P 500 rallied the equivalent of 180 to 225 points,” Lee wrote in a note to clients.

There will also be a batch of commentary from Fed officials for the market to contend with on Wednesday. Richmond Fed President Barkin is due to speak at 8:30 a.m.; Minneapolis Fed President Kashkari will speak at 9:45 a.m.; and Atlanta Fed President Bostic  will make comments at 1 p.m.. Also, the Fed Beige Book will be released at 2 p.m.. All times Eastern.