Investors Show Muted Reaction to Summit Deal, CPI Data with Focus on Fed Economic Projections

The major U.S. equity indexes are trading mixed shortly after the opening on Tuesday, perhaps setting the tone for what could be a lackluster session ahead of several key decisions by the U.S. Federal Reserve on Wednesday.

Investors are also showing little reaction to a preliminary deal struck between President Trump and North Korean leader Kim Jong-un to bring peace to the Korean Peninsula. Investors aren’t celebrating the news because the details of the agreement haven’t been worked out yet. Remember, this was an initial meeting and investors even said prior to the meeting that they didn’t expect to see any fruitful results.

I think the price action, or lack of price action is acceptable because there is nothing worse than having to deal with an overreaction in either direction to a non-event.

U.S. Consumer Inflation Report

Investors are also showing a muted reaction to today’s U.S. consumer data. Once again, this is not a surprised because the report met expectations. U.S. consumer inflation rose marginally in May amid a slowdown in increases in the cost of gasoline and the underlying trend continued to suggest moderate inflation in the economy.

According to the U.S. Labor Department, the Consumer Price Index increased 0.2 percent last month. That matched a similar gain in the CPI in April. In the 12 months through May, the CPI increased 2.8 percent, the biggest advance since February 2012, after rising 2.5 percent in April.

Keep in mind that annual inflation measures are rising as last year’s weak readings fall from the moving average calculation. May’s increase in both the CPI and core CPI was in line with economists’ expectations.

Treasury Markets and Fed

While stock investors may be showing limited reaction to the CPI data, U.S. Treasury investors found the rise in inflation strong enough to drive yields higher. The yield on the benchmark 10-year Treasury note was higher at around 2.979 percent, shortly after the release of the inflation data. The 30-year Treasury bond yield also rose to 3.116.

With the U.S.-North Korean Summit and the CPI reports out of the way, investors will be turning their attention to the start of a new monetary policy meeting by the U.S. Federal Reserve. Tuesday is the first day of the central bank’s two-day meeting.

Investors expect the Fed to announce a 25 basis point increase in its benchmark interest rate. However, the main focus will be on the language of the Fed’s monetary policy statement and FOMC member economic projections.

The monetary policy statement and economic projections will be the market movers because they may contain clues as to the Fed’s plan for future rate hikes in 2018. At this time, investors are still mixed over whether the central bank will raise rates one or two more times after June. This news will have a major impact on Treasury yields, the U.S. Dollar, stocks and gold.

If the Fed indicates it is going to be more aggressive then look for Treasury yields to rise. This move would make the dollar a more attractive investment while putting pressure on dollar-denominated commodities like gold.