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Investing.com -- It’s set to be a major week in markets - on Wednesday the Federal Reserve may pause a rate hike campaign that started 15 months ago, but it’s likely to be a close call and Tuesday’s U.S. inflation reading will be key. The European Central Bank and the Bank of Japan will also hold policy meetings while data out of China could bolster stimulus expectations.
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Fed decision day
The Fed is tipped to keep interest rates on hold at the conclusion of its two-day policy meeting on Wednesday, with investors focusing their attention on the ‘dot plot’, which outlines policymakers' expectations for future tightening.
Several Fed officials have indicated that a pause shouldn’t be taken as a sign interest rates have already peaked, but markets are pricing in another 25 basis point hike in July before a similar-sized cut by December.
Recent economic data has painted a mixed picture of the U.S. economy - inflation is moderating but remains well above the central bank’s 2% target, while the economy added a far larger than forecast 339,000 jobs in May even as wage growth cooled.
The Fed is also watching the impact on the economy from the banking turmoil and has suggested that tighter lending standards could help rein inflation, lessening the need for aggressive monetary tightening.
May inflation data
The Fed will have the latest U.S. inflation report to hand when they kick off their meeting on Tuesday.
Headline consumer prices are expected to rise by 0.3% on a monthly basis after a 0.4% increase in April. Core inflation, which strips out volatile food and fuel costs, is expected to rise by 0.4% month over month.
Market participants will be closely watching the inflation report for signs that the Fed's rate hikes are continuing to cool inflation without badly hurting growth.
The economic calendar also includes May data on producer price inflation on Wednesday, followed by retail sales figures for May along with the weekly report on initial jobless claims on Thursday.
Stock market
U.S. stocks have defied fears of a recession, a banking crisis and soaring Treasury yields to rise 20% from their October lows - one definition of a bull market.
A 20% gain from bear market lows has in the past heralded further upside for stocks.
A megacap stocks rally, better-than-expected earnings season, and expectations that the Fed is nearing the end of its rate-hiking cycle have supported U.S. equities so far this year, despite concerns over the prospect of a recession and persistent inflation.
"We're seeing indications that the economy is going to be more resilient to headwinds," said Tim Murray, a capital market strategist in T. Rowe Price's multi-asset division told Reuters. "There's reason to believe that the pessimism we saw at the start of the year is giving way to a stronger-than-expected market."