Cautious optimism filled the air as the new week kicked off, with stocks eking out modest gains ahead of a high-stakes economic data dump. However, uncertainty looms large, as investors, traders, and algorithms prepare for a potential volatility surge surrounding Wednesday's one-two punch: the latest inflation reading and the much-anticipated Federal Reserve meeting.
All eyes will be glued to the Consumer Price Index (CPI) report, which could reiterate the stickiness of inflation or provide relief with a benign print. Simultaneously, the Fed's release of its "dot plot" projections will offer critical clues about the central bank's rate hike trajectory for the remainder of 2024 and beyond.
While economists anticipate the Fed to hold rates steady this week, it's the accompanying language from Chair Jerome Powell and the dot plot that could spark market tremors. Some expect the dot plot to signal one or two rate cuts in 2024, reflecting policymakers' economic outlook. However, the author remains skeptical about imminent cuts, given the current data landscape.
The bond market has already begun positioning, with yields on the 10-year Treasury note ticking up ahead of the auction. Meanwhile, the U.S. dollar index pushed higher, suggesting traders are unconvinced about lower rates in the near future.
Volatility, as measured by the VIX "fear index," remains subdued for now, but a spike could signal growing unease among traders about potential surprises from the Fed.
