The markets are no longer convinced the economy will be strong enough for the Federal Reserve to raise interest rates two more times this year.
U.S. economic data has missed the mark for weeks now, and even though April data is improved over March, it is still disappointing. The market is pricing in about a rate hike and a half, even though the Fed has forecast two more rate hikes for this year. Fed officials have also said they could begin to take action to reduce the Fed's $4 trillion balance sheet by the end of the year.
"The [odds for a] June hike went from 80 percent to around 70 percent," said Aaron Kohli, director of fixed-income strategy at BMO Capital Markets. He said, based on fed funds futures, the odds for a second rate hike by December fell in the last several days to 37 percent from 65 percent.
Kohli said the futures began to reflect more doubt last week, but the move accelerated after the disappointing consumer price index inflation data on Friday.
"The Fed is more or less locked into the June hike, barring some cataclysmic data, but their path is much more questionable, especially if you don't get any fiscal stimulus," he said. Economists mostly expect two more hikes this year, with the next one in June and the second in September.
On Wednesday, traders will be watching for further developments from Washington, after reports that President Donald Trump provided Russian officials with classified information on ISIS, allegedly received from Israel. The New York Times reported after the market close Tuesday that Trump asked former FBI director James Comey to end his investigation into former national security advisor Michael Flynn. Flynn is at the center of the investigation into Trump's campaign ties to Russia. Comey was fired by Trump last week.