Eyes on central banks as Federal Reserve expected to halt hikes

Investor focus this week will be on central banks in the US, Europe and Japan, as the Fed is expected to pause its interest rate hiking cycle but retain a hawkish tone.

Investor focus this week will be on central banks in the US, Europe and Japan, as the Fed is expected to pause its interest rate hiking cycle but retain a hawkish tone following last week’s surprise rate increases from the RBA and the Bank of Canada.

In Australia, the sharemarket will be closed on Monday for the King’s Birthday public holiday. On Tuesday, business and consumer confidence numbers are expected to reflect the higher odds of a recession amid higher interest rates to control stubbornly high inflation.

“It’s a bit quieter, with the Reserve Bank and the GDP numbers out of the way. But obviously a lot of the focus is going to be on the US, all eyes will be on central banks,” AMP chief economist Shane Oliver said.

“We think a recession is 50/50 in Australia,” he said, noting “there’s a very high risk that the RBA rate hikes will knock us into recession, so we’ll probably see some further weakness in consumer confidence, and business confidence will probably come down a bit further too”.

On Tuesday, the focus will be on inflation numbers in the US, with the market’s expectation of a pause by the Fed on Wednesday very much dependent on that reading.

The expectation is for a further decline in headline inflation in the US from 4.9 per cent to 4.1 per cent. “That is quite a significant decline, because a year ago it was over 9 per cent,” Dr Oliver said.

US equities ended the week higher, with the S&P 500 moving further into bull market territory on Friday, driven by technology stocks and expectations that the Fed is nearing the end of its hiking cycle.

US Federal Reserve chairman Jerome Powell. Picture: Getty Images

Australian stocks closed the week down 0.3 per cent after the RBA surprised with its 12th cash rate increase in just over a year.

Investors will pay close attention to the Fed’s rates projections, after the bank last week voiced an inclination to “skip” action at the June meeting to leave its target rate at 5 to 5.25 per cent.

Traders are pricing a less than 30 per cent chance of a hike on Wednesday morning (local time), while also showing the possibility of a 0.25 per cent hike in July.

On Thursday, the European Central Bank is expected to add 0.25 per cent to the official rate to 3.5 per cent.

“It would be very uncharacteristic of the Fed to surprise the market against such a backdrop,” Barclays economists said in a note.

“But it could still surprise markets on the hawkish side – and we think it has good reasons to do so,” it added, noting wage growth data in certain parts of the US in May showed a jump.

“With equity markets in bull territory and housing prices rebounding, a message from the Fed that it is done hiking would likely loosen financial conditions further and boost self-reinforcing confidence effects, which would stand in the way of a sufficient cooling in the labour market.”

Fed policymakers, including chair Jerome Powell, have noted a pause should not be taken as a sign there won’t be further increases.

On Thursday, data from China is expected to highlight subdued domestic demand.

“China had a reopening boost earlier in the year and when they reopened from Covid restrictions, but in the last few months it has lost a bit of momentum. Data is likely to show that continued loss of momentum,” Dr Oliver said.

The Bank of Japan is likely to hold monetary policy steady on Friday, amid speculation Prime Minister Fumio Kishida is considering an early election.