The US Federal Reserve meets this week with its decision on whether to raise interest rates again on a knife-edge. Recessionary indicators may be flashing but the labour market is holding up remarkably well. Ahead of the decision comes key CPI inflation figures which will guide the market as to what to expect from the Fed. Then on Thursday it’s the turn of the European Central Bank, before the Bank of Japan rounds out a busy week for central bank action.

Here are the week’s key events:

Monday

The week starts in fairly benign fashion with some Japanese PPI inflation, German wholesale inflation and China’s foreign direct investment data. Later on, market appetite for US government debt gets a test with a 10yr bond auction – issuance in the wake of the debt ceiling being a hot topic for discussion among investors worried that it could drain the market of liquidity. The US Treasury may issue up to $1.3tn in short-term debt this year, sucking money and liquidity out of the markets, forcing yields higher. Oracle reports earnings.

Tuesday

Slowing headline CPI inflation in the US was what the market wanted a month ago– stocks rallied led by the Nasdaq as yields compressed. Headline CPI declined to 4.9% in April, but core inflation remained stubborn at 5.5%. Coming as the Fed kicks off its two-day meeting, the data will be pored over for what it means for policymakers. As of Jun 8th, the Cleveland Fed’s nowcast of inflation points to month-on-month inflation of 0.19% and core inflation of 0.45%, which would result in annualized inflation rate of 4.1% and 5.3% respectively.

Wednesday

Play, pause or skip: Next week the Fed can hike by 25bps and either signal more to come (strong hawkish) or that this is the end for now (dovish hike); it can pause, and signal it will wait on the incoming data further (soft dovish); or it skips – holds but signals it may raise rates in July (hawkish hold). Over the last month markets have generally been pricing in a roughly one-in-four chance it hikes; it’s now up to one in three. A lot will depend on the previous day’s CPI inflation data; we know the labour market remains robust, albeit business surveys point to a marked slowdown and recessionary indicators are flashing. US PPI inflation and UK GDP data are also up.

Thursday

Over to the European Central Bank (ECB), where officials have been sounding more hawkish as inflation has continued to rise above expectations. Rate hikes at this meeting and July seem assured. There is a definite sense that the ECB now maintains a bias towards higher interest rates rather than one to ease. At its last meeting in May, the ECB hiked rates by 25bps and signalled more to come, though no formal guidance was provided on what is next. The ECB also said it would likely stop reinvestments under the Asset Purchase Program (APP) in July, which was seen a bit more hawkish than the low-ball hike. June and July seem set for hikes – less clear beyond that as the ECB is worried about slowing growth and lag effects from the hikes already in the system. US retail sales, industrial production and the Empire State manufacturing index are also due.

Friday

The Bank of Japan seems set to hold the line with monetary policy, but key questions remain unanswered, such as whether it will tweak yield curve control policy and when might it start to normalise? Q1 growth exceeded expectations but headwinds are forecast as the global economy slows. Has the BoJ missed the window to normalise policy? If the lagged effects of ECB and Fed hikes hits exports and creates headwinds in H2 and H1 '24, inflation + growth may cool and the BoJ is left holding on without ever normalising policy. And with USDJPY touching 140, there is a lot of talk of FX intervention again. Also check final Eurozone CPI inflation data, whilst University of Michigan consumer sentiment and inflation expectations are due later.