What happens
Romeo, Mercutio, and Benvolio walk through Verona toward the Capulet party in masks. Romeo is moping — he says he's too sad to dance. Mercutio teases him for taking love too seriously and launches into the Queen Mab speech, an elaborate fantasy about a tiny fairy who rides through people's heads at night, giving lovers love-dreams, lawyers fee-dreams, soldiers cut-throat-dreams. Romeo cuts him off — "thou talk'st of nothing." As they reach the door, Romeo says he has a premonition: something hanging in the stars will start tonight, and end in his death.
Why it matters
Mercutio's Queen Mab speech is the longest non-soliloquy in the play, and one of Shakespeare's most virtuoso pieces of writing — and what's it for? On the surface it's mockery: Romeo, dreams are nonsense, get over yourself. But it slides, line by line, into something darker and sharper. By the time Mercutio is talking about Queen Mab teaching maids what to do on their wedding night, the speech is no longer comedy. Romeo's interruption — "thou talk'st of nothing" — is a relief. Mercutio agrees, and snaps back into the lightness he's most comfortable in.
Romeo's premonition is the play's first visible evidence of fate. "Some consequence yet hanging in the stars" — the stars again, picking up the prologue's "star-cross'd lovers." Shakespeare positions this so we hear the warning before Romeo has done anything. Then Romeo goes in to the party anyway. The play insists on both: he can sense it, and he can't stop himself, and both are true.
Structurally this scene is a hinge. The scenes around it are public — the brawl, the marriage talk. This one is private and male: three friends being themselves before the night they walk into. We see Mercutio at his fullest here, because we won't see him this fully alive again. He has two more scenes before he dies.