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Fed will dominate but GOP health care bill could be big for markets Wednesday

Fed minutes are expected to be the big story for markets Wednesday, but traders are also watching to see how the CBO scores the House health care bill.

Fed minutes are expected to be the big story for markets Wednesday, but traders are also watching to see how the Congressional Budget Office scores the House health care bill, an important step on the road to tax reform.

There will also be existing home sales and home prices data Wednesday, both of which are important after Tuesday's report of slumping April new home sales, which dropped by 11.4 percent. While the data is viewed as volatile and there were big upward revisions in March, there was still some concern about a weakening in the housing market.

Fed ahead

In its 2 p.m. ET minutes, the Fed is widely expected to keep up the drumbeat for its forecast of two more rate hikes this year. Its comments on the economy will be viewed as a measure of how confident it is about further hiking. It is also expected to provide some details on its discussions about shrinking the Fed's massive $4.5 trillion balance sheet.

Inflation comments are particularly important after CPI came in weaker than expected, and the Fed is not meeting its 2 percent target on its favored metric of inflation. That is core personal consumption expenditures inflation data, and it is next released on May 30.

Strategists say there's a good chance the Fed's comments will sound hawkish, and markets could react since traders have been doubting the Fed will be able to raise rates two more times this year. Soft economic data has been a concern, particularly inflation, and markets remain uncertain about the investigation surrounding President Donald Trump's campaign staff and Russia.

The Fed is widely expected to raise interest rates in June and then again in September, though the fed funds futures market is reflecting just about a 30 percent chance for the second hike. By December, many economists expect it to pause and focus instead on how it will reduce its balance sheet.

"What would keep them from going [in June]?" said Aaron Kohli, director, rates strategy at BMO. "A small inflation print, but that's a small probability They're locked and loaded and ready to go."

Kohli continued: "If you start to see housing markets weaken, how should that bias your view about how inflation should look in a month?" There's a risk to lower core inflation, he added.

"Shelter costs have been holding up core [inflation]. You've seen weakness in apparel and used cars," said Kohli.

Tax reform

As for health care, Republicans are hoping the CBO score will show the bill saving $2 billion over 10 years, which would make it eligible for budget reconciliation and a simple majority vote in the Senate. Failure to reach the $2 billion threshold means the bill, which barely passed the House, would have to be redone and voted on again.

"It's going to be hard to spin it positively because there will be two headlines. One will be how many people will get thrown out of their health insurance and the other will be the cost. Those are going to be the stories, and I don't think either one of them will be pretty," said Greg Valliere, chief global strategist at Horizon Investment. "Maybe it will be slightly better than the previous score on the bill that failed, but it's not going to be anything to brag about."

But even if the bill does get a better score, Valliere said it would never pass the Senate, which is drafting its own bill. "Right now, both sides are pretty well dug in. I think this would never make it through the Senate," said Valliere. "The only thing the market cares about is the tax bill. There are some signs of movement there." Health care has been set as a priority ahead of the tax bill, but Valliere said House Ways and Means Chairman Kevin Brady indicated he has a blueprint ready to discuss on tax reform after the Memorial Day holiday.

The health care bill scoring has been important for markets since if it fails and requires a new House vote, traders will take that as another delay.

"It gums up the works. It's another distraction and it's another reminder of things that are not getting done," said Kohli.

The government releases data on oil and gasoline inventories at 10:30 a.m. ET Wednesday. Oil prices could be volatile ahead of Thursday's OPEC meeting, where ministers are expected to approve a plan to extend production cuts by nine months.

There are also a few Fed speeches, including Dallas Fed President Robert Kaplan speaking in Toronto at 6 p.m. ET and Minneapolis Fed President Neel Kashkari, speaking at 6:30 p.m. ET.

On the budget front, Mick Mulvaney, director of the Office of Management and Budget, appears before the House Budget Committee at 9:30 am. Treasury Secretary Steven Mnuchin appears before the House Ways and Means Committee at 2 p.m.

House Speaker Paul Ryan holds a briefing at 11:30 a.m. with other GOP House leaders.

There are also earnings, including retailers Lowe's, Tiffany, and Chico's FAS. Advanced Auto parsts, and JA Solar also report before the bell. Williams-Sonoma , PVH, Pure Storoge and HP , report after the bell.

President Donald Trump continues his overseas trip, arriving in Italy Tuesday. He is scheduled to meet with NATO members and attend the G-7 starting Friday.

Watch: Small business concerned about health care