This week promises to be important for the markets. On Wednesday, the Federal Reserve may pause its campaign of interest rate hikes that started 15 months ago, but it is likely to be a close call, with inflation figures in the US on Tuesday being crucial. The European Central Bank and the Bank of Japan will also hold policy meetings, while data from China may support expectations of stimulus measures.
Federal Reserve decision day The Federal Reserve is leaning towards keeping interest rates unchanged at the conclusion of its two-day policy meeting on Wednesday, and investors are focused on the “dot plot” that outlines policymakers’ expectations for future tightening.
Several Fed officials have indicated that the pause should not be interpreted as a sign that interest rates have already peaked, but markets are pricing in another 25 basis point hike in July followed by a similar cut by December.
Recent economic data has painted a mixed picture of the US economy: inflation is slowing but remains well above the central bank’s 2% target, while the economy added significantly more jobs than expected in May, 339,000, despite a slowdown in wage growth.
The Fed is also monitoring the impact of banking stresses on the economy and has suggested that tighter lending standards may help tame inflation, reducing the need for aggressive monetary policy tightening.
May inflation data The Fed will have its final inflation report for the US when it begins its meeting on Tuesday.
Core consumer prices are expected to rise by 0.3% on a monthly basis, following a 0.4% increase in April. Core inflation, which excludes volatile food and energy expenses, is expected to rise by 0.4% compared to the previous month.
Market participants will closely watch the inflation report for signs that the Fed’s rate hikes are continuing to cool inflation without causing significant harm to growth.
The economic calendar also includes May producer price inflation data on Wednesday, followed by retail sales data for May and the weekly initial jobless claims report on Thursday.
Stock market US stocks have risen 20% from their October lows, defying concerns of a recession, a banking crisis, and rapidly rising Treasury yields, marking one definition of a bull market.
A 20% rise from bear market lows in the past has typically signaled further gains for stocks.
The rise in mega-cap stocks, better-than-expected earnings season, and expectations that the Fed is nearing the end of its rate hike cycle have supported US stocks this year despite concerns about recession prospects and persistent inflation.
“We are seeing signs that the economy is becoming more resilient to headwinds,” said Tim Murray, a capital markets strategist at T. Rowe Price. “There are reasons to believe that the pessimism we saw at the beginning of the year is giving way to a market that is stronger than expected.”
Central bank meetings Meeting the day after the Fed decision, the European Central Bank is likely to deviate from its American counterpart as markets are prepared for another 25 basis point rate hike, with a similar increase expected in July.
The ECB slowed the pace of rate hikes to 25 basis points at its May meeting following a series of hikes totaling 75 and 50 basis points.
ECB President Christine Lagarde said last Monday that it is still too early to talk about the peak in underlying inflation and confirmed rates would have to be raised again.
Inflation in the eurozone currently stands at 6.1%, still three times the ECB’s 2% target but down from a peak of 10.6% in October of last year.
Meanwhile, the Bank of Japan is expected to make no changes to its monetary policy at its meeting on Friday after newly appointed Governor Katsunori Ueda stated that ultra-loose policy will remain in place until wage growth and inflation become stable and sustainable.
China data China will release May data on new home prices, unemployment, industrial production, and retail sales on Thursday, following recent data showing the country’s economic recovery losing momentum.
Shares of developers have risen in recent sessions on rumors of a new property support package.
Last week’s data showing a significant decline in China’s exports in May had little impact on the market as investors bet that weak data would confirm the need for stimulus.
