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As traders watch oil, markets start to hear different drummer

A move higher in oil prices could continue to support stocks Wednesday, as markets dance around growing expectations for a Fed rate hike.

Fed funds futures Tuesday were forecasting a nearly 40 percent chance of rate hike in June and 68 percent chance in July — a jump from Monday's levels of around 30 percent and 60 percent. At the same time, bond yields moved higher and stocks soared. Oil closed higher with West Texas Intermediate rising above $49 per barrel in late trading — a level last seen in October.

Three Fed speakers could add to the drumbeat for higher rates Wednesday, which began in earnest last week when the Fed released minutes that showed Fed officials would like to hike as soon as June. Philadelphia Fed President Patrick Harker speaks at 9 a.m. EDT on the economy; Minneapolis Fed President Neel Kashkari speaks at 11:40 a.m. at the Williston Basin Petroleum Conference in North Dakota, and Dallas Fed President Rob Kaplan speaks in Houston at 1:30 p.m. EDT.

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders work on the floor of the New York Stock Exchange.

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"The market is slowly but grudgingly moving to the fact that the Fed may be going, or may not be going [to hike rates], at the June meeting," said Chris Rupkey, chief financial economist at MUFG Union Bank. "It's one step forward. One step back. You really have to pull the market into it. The bond traders are right in a way. We've been burned so many times thinking they're going to go. Then something new comes along, and it's back off the table."

Thursday's data includes FHFA home prices at 9 a.m. and an advanced read on international trade for April at 8:30 a.m. EDT.

"[Trade] was the last number that [Fed Chair Janet] Yellen kind of pointed to. She was talking about one of the direct effects of the global slowdown in growth was felt in the U.S. by the fact that U.S. manufacturers weren't able to export as many goods to the rest of the world," said Rupkey. "We have seen a pronounced slowing of exports this year. It would be interesting to see if this gets a bit of a bounce here."

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The Dow rose 213 points Tuesday to 17,706, and the S&P 500 was up 28 at 2,076. The two-year yield was at 0.92 percent in late trading, after a strong auction priced to yield at that level earlier in the day. The markets are looking forward to the auction of $34 billion five-year notes at 1 p.m. EDT Wednesday.

"I would love to say we'll have some follow-through," said Art Hogan, market strategist with Wunderlich Securities. "I certainly think, as today we'll see how Europe looks in the morning. That was certainly the kick-start of our day." The euro lost ground, giving a boost to European equity markets Tuesday. A new poll showing U.K. voters favoring staying in the EU also helped sentiment. European markets helped drive U.S. stocks higher, but housing data also contributed, with new home sales up a stunning 16.6 percent in April, the biggest monthly jump in 24 years.

"When you have a day like that with great breadth, good volume, positive moves in all sectors, what stands out is technology had a big day, financials had a big day, health care had a big day. All three of those are laggards," said Hogan. "I see that as constructive, and I'd like to see two days in a row like that."

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The S&P technology sector was up 2.1 percent, while financial and health care both closed up about 1.5 percent Tuesday.

On Wednesday, the U.S. Energy Information Administration oil and fuel releases inventory data at 10:30 a.m. EDT.

"You have a smattering of economic data," said Hogan. "To the extent you had inventory data that looked bullish for oil, if there's a big number at 10:30 that could help." American Petroleum Institute data late Tuesday reported a draw-down of 5.1 million barrels in U.S. crude, double what was expected. Gasoline inventories were higher, but crude stocks at the Cushing, Oklahoma, delivery hub fell by 189,000 barrels.

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WTI crude futures finished Tuesday up 1.1 percent at $48.62, the first finish above Brent crude futures since January. The international benchmark was up about a half percent at $48.61. U.S. crude is more affected by the loss of production in Canada, where forest fires led to the shutdown of production in the oil sands region.

Companies reporting earnings Wednesday include Bank of Montreal, Tiffany, Eaton Vance and Express, ahead of the open. HP, Costco, Williams-Sonoma, Lions Gate and PVH report after the closing bell.