Dow struggles as stock-market investors await Fed update

What’s driving the market?

It is all eyes on the Fed’s inflation outlook on Wednesday, with the U.S. central bank set to offer, at 2 p.m. Eastern Time, updates on its April policy statement, and its projections for where interest rates will stand in the future.

“This is one of the most keenly awaited Fed meetings this year and could be pivotal to market sentiment,” wrote Fiona Cincotta, senior financial markets analyst at City Index, in emailed comments.

Fed Chairman Jerome Powell is likely to indicate, at a 2:30 p.m. press conference, that policy makers aren’t going to change interest rate policy, which stand at a range between 0% and 0.25%, at least through the end of 2022, economists say.

However, investors will be attuned to the Fed’s statements on the plan for reducing its pandemic-era monetary accommodation, including its purchases of $80 billion of Treasurys and $40 billion of mortgage-backed securities each month.

Last Thursday’s consumer-price index report from the U.S. Labor Department showed that the cost of living surged in May and drove the pace of inflation to a 13-year high of 5%, reflecting a broad increase in prices confronting Americans.

In the face of rising inflation, the timing of any tapering of asset purchases looks tricky for the U.S. central bank since the recovery in the labor market still looks shaky and is reflected in the weaker-than-expected May nonfarm payrolls report and the job openings data which hit a record 9.3 million.

Thus far the Fed has described evidence of inflation as largely derived from transitory factors, including a removal of lockdown protocols intended to damp the spread of coronavirus, as well as supply-chain bottlenecks.

“Whether the Fed decides to start introducing talk towards tapering is a coin toss right now,” wrote Cincotta.

Check out: 4 things to watch as the Fed makes its latest monetary-policy decision

“Should the Fed continue singing unwaveringly from the dovish hymn sheet then the S&P500 could surge to fresh all time highs. Any clues of a move towards tightening could see stocks come off. But they are at all time highs so may this makes it good timing?” the analyst said.

Still, some prominent investors and economists have voiced the opinion that the Fed may be too complacent about rising prices and that they that could turn out to be more lasting that the central bank forecasts.

Read: An inflation storm is coming for the U.S. housing market

“We aren’t in the camp that says a sustained inflation problem is a done deal, but we do think that the Fed now needs everything to go right if inflation is to return to the target, as per the March forecasts, by the end of next year,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note.

A CNBC Fed survey indicates that market participants believe that the central bank may hold its bond-buying program steady through the end of the year, but begin to signal its intent to taper by October and begin doing so by the start of 2022.

In other news, China said it plans to release national reserves of major industrial metals as to rein in a soaring commodities prices amid a resumption of global economic activity. That news comes as data out of China showed that factory output slowed for a third straight month in May. Chinese industrial production rose 8.8% in May from a year ago, slower than the 9.8% uptick in April.

Elswhere, annual inflation in the U.K. exceeded the Bank of England’s target in May for the first time in almost two years. Consumer prices rose 2.1% on the year in May, the Office for National Statistics said Wednesday, the fastest pace of growth since July 2019.

Meanwhile, President Joseph Biden and his Russian counterpart Vladimir Putin were set to meet later Wednesday in Geneva.

In other economic news, U.S. housing permits dropped 3% in May to 1.68 million yearly pace, while starts climbed 3.6% to 1.57 million annual rate. April U.S. housing starts were lowered to 1.52 million from 1.76 million. U.S. import prices rose 1.1% in May—and were up 0.9% minus fuel—contributing to an 11.3% in the past 12 months.

Which companies are in focus?

• Oracle stock ORCL, -5.57% was in focus after Q4 results late Tuesday. The tech company reported fourth-quarter earnings of $4.03 billion, or $1.37 a share, on sales of $11.23 billion, up from $10.44 billion a year ago. Shares were down 4.5%.
• Shares of meal-kit provider Blue Apron Inc. APRN were in focus after the company priced a dilutive stock offering of 4.7 million shares at a discount of $4.25 per share. Its stock was down 19%.
• ARK Invest disclosed that it purchased DraftKings DKNG shares worth $42 million on Tuesday, the same day the short selling research firm Hindenburg alleged the company’s gambling-technology unit operates in countries where gambling is banned. DraftKings says the subsidiary, SBTech, doesn’t operate in any illegal market. The DraftKings purchases by Ark — in the Ark Innovation ETF ARKW and the Ark Next Generation Internet ETF ARKK—were the largest single stock purchase by the Cathie Wood-run fund manager on Tuesday. Shares of DraftKings were off less than 1%.
• Confluent Inc. CFLT, has set terms of its initial public offering, which could value the California-based data infrastructure software company at up to $8.33 billion.
• Elanco Animal Health Inc. ELAN said Wednesday it has entered an agreement to acquire Kindred Biosciences Inc. KIN for about $440 million, adding three potential dermatology blockbusters to its pipeline. Shares of Elanco were up 3%, while those for Kindred surged 45%.
• WalkMe Ltd. WKME, an Israeli customer engagement platform, said Wednesday its initial public offering priced at $31 a share, compared with its proposed price range of $29 to $32.
• Amazon.com Inc. AMZN said Wednesday it has committed $300 million to help accelerate the creation of up to 3,000 new affordable housing units across the Puget Sound area in Washington, in Washington, D.C. and Nashville. Its stock was up less than 1%.

How are other assets faring?

• The yield on the 10-year Treasury note TMUBMUSD10Y barely slipped to 1.503%, holding relatively steady versus 1.498% on Tuesday. Yields and bond prices move in opposite directions.
• The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, was little changed at around 90.531.
• Oil futures CL00 retreated slightly, with West Texas Intermediate crude for July delivery off 0.1% at $72.07 a barrel, after its nearly 2% rise on Tuesday. Gold futures GC00 added 0.1% to reach $1,858.40 an ounce, attempting to snap a three-session slump.
• European equities rose, with the pan-Continental Stoxx Europe 600 SXXP up 0.2%, on track for a record-extending 9th straight all-time closing high. London’s FTSE 100 UKX  was trading 0.2% higher.
• In Asia, the Shanghai Composite SHCOMP closed down 1%, Hong Kong’s Hang Seng Index HSI ended 0.7% lower and Japan’s Nikkei 225 NIK shed 0.5%.