What will Fed do tomorrow?

The May CPI came in at just 4% today, significantly lower than a few months ago. The market was on fire, pushing SPX to 4370. The million dollar question now is what the Fed will do tomorrow and if the market can continue to jump higher! Anything is possible, of course and I actually opened two trades today to bet on both sides. But purely for fun, I'm betting for a negative reaction, especially to JPowell post-meeting conference. Tomorrow Fed's rate hike pause is widely expected and nothing surprising but Powell's dovish or hawkish tone is critically important for the market. I think Powell will sound more hawkish due to still very sticky inflation, even though the headline inflation seems to have declined significantly.

Here's CNBC:

Excluding volatile food and energy prices, the picture wasn't as optimistic.

So-called core inflation rose 0.4% on the month and was still up 5.3% from a year ago, indicating that while price pressures have eased somewhat, consumers are still under fire.

For more context, let's look at core CPI data since January. Here's how those numbers shake out:

January – 5.55%

February – 5.53%

March – 5.60%

April – 5.54%

May – 5.33%.

Pretty much going nowhere, right?

That makes me think that Powell will convey the message tomorrow that the anti-inflation is far from being done and there is no expectation for a rate reduction for this year, which is widely priced in by the market. If so, I think we will see a huge firework to the downside, given how euphoric the market has been in the past few days.

An interesting firework show tomorrow!