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.

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.”

Central bank meetings

Meeting a day after the Fed decision, the European Central Bank is likely to diverge from its U.S. peer with markets primed for another quarter point rate hike, with a similar size increase expected to follow in July.

The ECB slowed the pace of its rate hikes to 25 basis points at its May meeting after a series of 75 and 50 basis point moves.

ECB President Christine Lagarde said last Monday it was too early to call a peak in core inflation and reaffirmed rates would need to be increased again.

Eurozone inflation is currently running at 6.1%, still over three times the ECB’s 2% target but is down from a peak of 10.6% in October last year.

Meanwhile, the Bank of Japan is widely expected to make no changes to monetary policy at its meeting on Friday after recently appointed Governor Kazuo Ueda indicated that ultra-easy policy will remain in place until wage gains and inflation are stable and sustainable.

China data

China is to release May data on new home prices, unemployment, industrial production and retail sales on Thursday after recent data indicated that the post-COVID economic recovery is losing momentum.

Property developer shares have rallied in recent sessions on speculation of a new property support package.

Data last week showing a huge miss in China’s May exports barely caused a dent in the market, as investors bet the weak reading bolsters the case for stimulus.