The Federal Reserve is to meet as key U.S. inflation data is released. The Bank of Japan is also to meet and economic data out of the U.K. will inform the Bank of England as it contemplates rate cuts. Here's your look at what's happening in markets for the week ahead.

Fed decision

With the Fed widely expected to leave interest rates on hold at the conclusion of its two-day policy meeting on Wednesday market watchers are instead focused on how many rate cuts officials will signal for the rest of 2024.

The updated dot plot will likely point to two 25-basis point cuts this year, down from three in March.

Friday’s employment data, which showed both jobs and wage growth accelerated in May even though the unemployment rate ticked higher, saw markets pare back expectations for rate cuts this year, with the first rate cut now expected to come in September.

Recent comments by Fed officials have indicated they are in no rush to cut rates as inflation remains persistent and the outlook for growth remains solid.

Inflation has cooled after aggressive rate hikes starting in 2022 but has not yet fallen to its 2% target.

May inflation data

Inflation figures for May are due to be released just hours before the Fed statement on Wednesday. Further signs of inflation easing could cement expectations for rate cuts, especially given signs of economic weakness.

Wall Street, boosted by cooling inflation, will be watching closely. Traders continue to price in some monetary easing this year, with even some slim hopes of a July cut.

A bad inflation miss could spook investors and bring back recession fears that have laid dormant for months.

No doubt, the data could fire markets up ahead of Fed Chair Jerome Powell's post-meeting press conference.

Wall Street

Wall Street will be closely watching Wednesday’s inflation data and Fed meeting for clues on whether the soft-landing hopes that drove stocks to record highs are still justified.

"No one expects the Fed to cut (rates next week), but will they open the door for a cut as soon as September is the big question on everyone's mind," Ryan Detrick, chief market strategist at the Carson Group told Reuters, adding he still sees a September reduction on the table.

This year's rally has lifted the S&P 500 up more than 12% year-to-date, on expectations the Fed can cool inflation without hurting growth. Yet recent economic data have sent conflicting signals: Friday’s jobs report was far stronger than expected, while earlier reports showed a slowdown in manufacturing and a first-quarter growth rate revised lower.

“The market would like some clarity and not see the Fed have to wait until December or January to begin cutting rates,” said Paul Christopher, head of global market strategy at the Wells Fargo Investment Institute, adding a long period of elevated borrowing costs could hurt the economy.

UK data

Market participants will be closely watching the latest U.K. jobs report on Tuesday as they try to gauge whether wage pressures are easing fast enough to make a Bank of England rate cut a near-term prospect.

© Reuters.

© Reuters.
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Investing.com -- The Federal Reserve is to meet as key U.S. inflation data is released. The Bank of Japan is also to meet and economic data out of the U.K. will inform the Bank of England as it contemplates rate cuts. Here's your look at what's happening in markets for the week ahead.

Fed decision

With the Fed widely expected to leave interest rates on hold at the conclusion of its two-day policy meeting on Wednesday market watchers are instead focused on how many rate cuts officials will signal for the rest of 2024.

The updated dot plot will likely point to two 25-basis point cuts this year, down from three in March.

Friday’s employment data, which showed both jobs and wage growth accelerated in May even though the unemployment rate ticked higher, saw markets pare back expectations for rate cuts this year, with the first rate cut now expected to come in September.

Recent comments by Fed officials have indicated they are in no rush to cut rates as inflation remains persistent and the outlook for growth remains solid.

Inflation has cooled after aggressive rate hikes starting in 2022 but has not yet fallen to its 2% target.

May inflation data

Inflation figures for May are due to be released just hours before the Fed statement on Wednesday. Further signs of inflation easing could cement expectations for rate cuts, especially given signs of economic weakness.

Wall Street, boosted by cooling inflation, will be watching closely. Traders continue to price in some monetary easing this year, with even some slim hopes of a July cut.
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A bad inflation miss could spook investors and bring back recession fears that have laid dormant for months.

No doubt, the data could fire markets up ahead of Fed Chair Jerome Powell's post-meeting press conference.

Wall Street

Wall Street will be closely watching Wednesday’s inflation data and Fed meeting for clues on whether the soft-landing hopes that drove stocks to record highs are still justified.

"No one expects the Fed to cut (rates next week), but will they open the door for a cut as soon as September is the big question on everyone's mind," Ryan Detrick, chief market strategist at the Carson Group told Reuters, adding he still sees a September reduction on the table.

This year's rally has lifted the S&P 500 up more than 12% year-to-date, on expectations the Fed can cool inflation without hurting growth. Yet recent economic data have sent conflicting signals: Friday’s jobs report was far stronger than expected, while earlier reports showed a slowdown in manufacturing and a first-quarter growth rate revised lower.

“The market would like some clarity and not see the Fed have to wait until December or January to begin cutting rates,” said Paul Christopher, head of global market strategy at the Wells Fargo Investment Institute, adding a long period of elevated borrowing costs could hurt the economy.

UK data

Market participants will be closely watching the latest U.K. jobs report on Tuesday as they try to gauge whether wage pressures are easing fast enough to make a Bank of England rate cut a near-term prospect.
3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads.

Average weekly earnings, excluding bonuses, rose by an annual 6% in the three months to March, and April's 9.8% increase to Britain's minimum wage may push that growth rate higher.

Until recently, economists expected a June rate cut but persistent inflation pressures mean markets are not now fulling pricing in a move until November.

Meanwhile, April GDP data on Wednesday is expected to show growth softened after a robust 0.6% expansion in the first quarter.

Elsewhere, the opposition Labour Party is to launch its manifesto ahead of the July 4 election. While polls suggest Labour will hammer Prime Minister Rishi Sunak's Conservatives, some business leaders doubt Labour can turn around Britain's recent weak growth performance.

BOJ

Bank of Japan Governor Kazuo Ueda has already hinted at some kind of taper of the bank’s long-running quantitative easing program when the BOJ concludes its two-day meeting on Friday.

On Thursday he said it would be appropriate to reduce still-massive bond purchases as the BOJ exits decades of stimulus, stressing policymakers will move "cautiously" on rate hikes after delivering its first rise since 2007 in March.

Mizuho Securities sees a good chance of a 1 trillion yen ($6.4 billion) cut in monthly purchases to roughly 5 trillion yen per month, which could be weathered by bond markets.

Whether that supports the battered yen is a separate matter, with the BOJ and government concerned a weak currency could derail a hoped-for cycle of mild inflation and steady wage gains.

The U.S. job market is still hot. The NFP report, released on Friday, showed the addition of 272,000 jobs in May, crushing analyst estimates.

Such a divergence from the consensus is likely have a substantial effect on the Federal Reserve. This surge suggests sustained momentum in the labor market. 

As a result, the central bank, which has been closely monitoring employment figures, may see the strong job growth as a reason to hold off on initiating rate cuts.

The rise in the unemployment rate to 4.0% may seem counterintuitive given the substantial job gains, yet it is a nuanced indicator that could reflect changes in labor force participation or other demographic shifts within the U.S. economy.

What economists are saying about the NFP report

Bank of America: "The bottom line is that the stronger-than-expected May employment report remains consistent with our monetary policy outlook for staying on hold. This report showed solid payroll gains with positive implications for consumer spending."

"We expect the Fed to stay on hold for now and start a gradual cutting cycle in December which will depend on a moderation in the inflation data. The economy may be cooling, but it is not cool."

TD Securities: "The FOMC is widely expected to keep the Fed funds target range unchanged at 5.25%-5.50%, with Chair Powell likely providing a similar policy message to May."

"However, the risk is that the chairman appears somewhat optimistic given the recent evolution of the US consumer, and if the May CPI report shows further inflation progress. We also look for the dot plot to show two cuts as the median for 2024 and four for 2025."

Evercore ISI: "Within broad ranges, the inflation data not the jobs data will determine whether the Fed cuts in September or not."

Investec: "Our base case is for a September start to easing, with the Fed moving policy rates gradually lower from there. The actual decision at next week’s meeting is unlikely to throw too many surprises, but we will be hunting for clues as to whether our idea of where rates are heading matches that of the Fed’s."

Jefferies: "Bottom line is that the Fed is still firmly on hold. Next week's CPI is likely to print +0.1%/+0.3%, and we see some upside for a +0.2% on the headline. A July cut is also likely a pipe dream, and it's unlikely that things will fall apart quickly enough before September for a cut as well."

"We continue to expect 1 cut in 2024, likely in November or December depending on how the Fed handles the election results."

UBS: "This report seems likely to continue to bolster FOMC participants' assessments of the expansion's resilience. It also puts at risk our expectation that the June SEP has a 2 cut dot median for 2024. However, there are a other reasons for the FOMC retaining the option of a September rate cut and keeping market pricing between one and two cuts while they await more data."

Citi: "We are shifting our base case for a first rate cut from July to September on well-above-consensus 272k new jobs in May. We now expect 75bp of total cuts this year in September, November and December."

"But the jobs report does not change our view that hiring demand, and the broader economy, is slowing and that this will ultimately provoke the Fed to react with a series of cuts beginning in the next few months."

In a note released earlier in the week, Bank of America economists explored why is the fiscal impulse fading despite ongoing large deficits.

The bank’s latest US Economic Weekly noted that the slowdown in private and public investment in Q1 2024 indicates that last year’s significant fiscal boost is now diminishing.

“We were not surprised by this development, as we have been arguing that the fiscal impulse was likely to turn roughly neutral this year,” economists said in a note.

A common question raised by clients is why fiscal policy doesn't continue to support economic growth, given the “unsustainable” deficits. In attempts to address these concerns, BofA clarifies that "the level of GDP is related to the size of the deficit, but growth in GDP is a function of the change in the deficit relative to the previous year."

“We think the confusion arises because the deficit is widely understood to be a flow variable, but GDP is sometimes mistaken for a stock, whereas it is actually also a flow,” economists added.

They further explain that large deficits do not necessarily translate into ongoing economic expansion. Typically, a substantial fiscal expansion results in a level shift up in GDP. However, if the deficit remains stable or contracts slightly afterward, the impact of fiscal policy on GDP growth (the fiscal impulse) can shift from strongly positive to flat or even negative.

Citing Fed Chair Powell’s remarks, the current fiscal path may be “unsustainable,” but this does not mean fiscal policy remains expansionary, BofA’s team explained.

Illustrating this point, BofA points to the primary deficit-to-GDP ratio, which is currently eight-tenths below the same period from a year ago, “suggesting that Federal fiscal policy is a drag on growth despite elevated deficit levels,” the bank said.