As we head into the week, major financial events are set to unfold, including key meetings by the Federal Reserve and the Bank of Japan, alongside critical economic data from the U.K. that will influence the Bank of England’s decisions. Here’s a preview of what’s happening in the markets this week.
1. U.S. Federal Reserve and Inflation Data
The Federal Reserve’s upcoming meeting coincides with the release of crucial U.S. inflation data. An unexpected inflation spike could alarm investors, reviving recession concerns that have been subdued recently.
This data will likely impact market movements ahead of Fed Chair Jerome Powell’s press conference post-meeting.
Wall Street’s Focus
Wall Street is keenly eyeing Wednesday’s inflation report and the Fed meeting for indications on whether the optimistic outlook that has driven stocks to record highs remains valid.
“No one expects the Fed to cut rates next week, but the possibility of a rate cut in September is the big question,” said Ryan Detrick, Chief Market Strategist at the Carson Group, speaking to Reuters. He still sees a September reduction as a possibility.
This year’s market rally has propelled the S&P 500 up over 12% year-to-date, driven by hopes that the Fed can manage inflation without stifling growth. However, recent economic reports have been mixed: while Friday’s jobs report exceeded expectations, earlier data indicated a slowdown in manufacturing and a downward revision of first-quarter growth rates.
“The market seeks clarity and prefers not to wait until December or January for rate cuts,” stated Paul Christopher, Head of Global Market Strategy at Wells Fargo Investment Institute, noting that prolonged high borrowing costs could harm the economy.
2. U.K. Economic Data
On Tuesday, the latest U.K. jobs report will be closely monitored to determine if wage pressures are diminishing sufficiently to make a Bank of England rate cut likely in the near term.
3. Federal Reserve Decision
While the Fed is expected to hold interest rates steady at the end of its two-day policy meeting on Wednesday, the focus will be on the number of rate cuts officials signal for the rest of 2024.
The updated dot plot is anticipated to suggest two 25-basis point cuts this year, a decrease from three predicted in March.
Friday’s employment data, which showed increased job and wage growth for May despite a slight rise in the unemployment rate, led markets to adjust their expectations for rate cuts this year, with the first now expected in September.
Recent Fed officials’ comments indicate a reluctance to cut rates too soon, given persistent inflation and a solid growth outlook.
Inflation has cooled following aggressive rate hikes starting in 2022, but it has not yet reached the 2% target.
4. May Inflation Data
May’s inflation figures, set to be released hours before the Fed’s Wednesday statement, could solidify expectations for rate cuts, especially with signs of economic weakening.
Wall Street, buoyed by easing inflation, will be watching closely. Traders are pricing in some monetary easing this year, with even a slim chance of a July cut.
5. Bank of Japan Meeting
Bank of Japan Governor Kazuo Ueda has hinted at tapering the bank’s extensive quantitative easing program, which could be announced at the conclusion of the BOJ’s two-day meeting on Friday.
Ueda mentioned the possibility of reducing the bank’s substantial bond purchases, marking a cautious step towards exiting decades of stimulus, following the first rate hike since 2007 in March.
Mizuho Securities anticipates a potential reduction in monthly bond purchases by 1 trillion yen ($6.4 billion) to approximately 5 trillion yen per month, a change that bond markets could handle.
Whether this move will support the weakened yen remains uncertain, as the BOJ and government are wary that a weak currency could disrupt the expected cycle of mild inflation and steady wage increases.