Good morning! The Nasdaq and S&P 500 notched record closes on Tuesday, while the Dow tumbled more than 100 points.

This morning at 8:30 a.m. ET, May CPI is due, and the Fed decision on interest rates comes later this afternoon at 2 p.m..

No one expects the central bank to announce any imminent policy adjustments — so investors will instead be fixated on something else.

All eyes on the dots

Central banks around the world have started to cut interest rates, but don’t look for the Federal Reserve to join in anytime soon.

This afternoon, central bank officials are widely expected to keep the short-term benchmark rate unchanged in the 5.25% and 5.5% range — no matter what the May inflation report says this morning. 

In all likelihood, Jerome Powell won’t reveal much in his press conference as far as next steps. That leaves investors to zero in on the Fed’s economic projections for the rest of the year — the so-called dot plot. 

It could signal one, two, or even no cuts ahead. 

“The dot plot will be a close call,” said Joseph Kalish, chief macro strategist at Ned Davis Research.

“Our count shows nine participants looking for two rate cuts this year, but ten looking for one or none.”

Back in March, central bankers’ median forecast was for three 25-basis-point cuts in 2024.

But a series of hot economic reports — including Friday’s blowout nonfarm payrolls report — have weighed on those forecasts. 

Futures markets, for their part, now imply between one and two cuts before year’s end, likely starting in September.

JPMorgan’s Marko Kolanovic, one of Wall Street’s most bearish analysts, expects just one.

Multiple Fed officials have stated that they won’t rush to cut rates, and that’s fueled debate on whether monetary policy is actually restrictive or not. 

Stocks, meanwhile, have marched higher all year. The policy uncertainty hasn’t proved debilitating because traders have been fixated on the lack of hikes, rather than the lack of cuts. 

Plus, earnings have been mostly stellar, the economy is still humming, and the wave of AI enthusiasm has buoyed the biggest names in everyone’s portfolios.

If higher borrowing costs stick around much longer, however, each of those variables could eventually deteriorate.

“Clearly the stock market has been able to rally in the absence of cuts, but sooner or later lower rates will be necessary for the market to maintain its current multiples,” said Chris Zaccarelli, the CIO for Independent Investor Alliance.

To his point, consumers are already showing signs of buckling, so they too have reason to monitor the dot plot.

The Fed hasn’t reached its 2% inflation target yet, but keeping borrowing costs high will only squeeze everyday Americans further.

“The Fed has a dentist’s mentality believing that pain now will save you suffering down the road,” said Bryce Doty, senior portfolio manager with Sit Investment Associates.

“They are oblivious to how high interest rates are driving up costs for businesses that are being passed onto the consumer.”

How many interest rate cuts, if any, do you expect in 2024? Hit reply to this email or let me know on X @philrosenn.

*At a glance:

Elsewhere:

📉Consumer prices are due this morning. May CPI comes out at 8:30 a.m. ET, hours before the Fed’s policy decision at 2 p.m. Over the last month, prices are expected to have climbed 0.1%, down from April’s 0.3% gain. If that holds true, it would be the smallest month-over-month gain since October 2023. (Yahoo Finance)

💰️The 11th hour of Elon Musk’s $46 billion pay package is here. The vote is too close to call for now, but the billionaire has personally joined meetings with key Tesla investors in the days leading up to the decision. He has pitched key shareholders on why the future of the company relies on his presence. (WSJ)

💵The US dollar is hovering near a new high for 2024. On Tuesday, Bloomberg’s Dollar Spot Index climbed for a fourth consecutive session. It’s within spitting distance of this year’s peak, last hit in the middle of April. That surge could continue depending on how CPI shakes out this morning. (Bloomberg)

Rapid-fire:

• Apple stock rallied to a record high the day after it unveiled new AI tech (Barron’s)

• Bonds rallied after an auction for 10-year notes saw stronger than expected demand on Tuesday (Bloomberg)

• “Anti-woke” shareholders are going after corporate bonds (WSJ)

• Options markets imply Tesla stock will swing 7% in either direction depending on the vote on Elon Musk’s pay package (Barron’s)

• The UK’s financial watchdog is about to approve a massive overhaul to its listing regime (FT)

• Raspberry Pi debuted in public trading in London with a 43% rally (Bloomberg)

Last thing:

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