Brief:
This week, key U.S. inflation data will test the Federal Reserve’s high-interest-rate defences from all angles. Simultaneously, interest rate decisions from the European Central Bank and the Bank of Canada will take centre stage.
Against a backdrop of sluggish domestic economic momentum, these two major non-US central banks are set to trigger a significant re-evaluation of yield differentials and capital reallocation across global asset classes.
Key Event to Watch:
1. U.S. May NY Fed 1-Year Inflation Expectations – Monday
Monday’s NY Fed inflation expectations survey is an important reference point for policymakers assessing price risks. Should the survey show a rebound in consumer expectations for price increases over the coming year, it would further illustrate the complexity of the disinflation process, potentially providing support for the dollar index.
2. U.S. May Unadjusted CPI (YoY) – Wednesday
On Wednesday, the U.S. will release its CPI data. If headline inflation or the core sub-components continue to exhibit significant stickiness, it will substantially push back the market’s pricing for interest rate cuts, driving long-term Treasury yields higher and strengthening the U.S. dollar.
3. BOC Rate Decision – Wednesday
On the same day, the Bank of Canada will announce its interest rate decision. Back in May, the BoC indicated that a rate hike could be warranted if oil prices remained persistently high. However, with “considerable uncertainty” currently clouding oil price forecasts, BoC board members appear inclined to look through the initial inflationary shock caused by rising oil prices.
4. ECB Rate Decision – Thursday
The European Central Bank will announce its latest interest rate decision on Thursday. Amid a persistent upward trend in inflation, the central bank began discussing a rate hike last month, with several policymakers subsequently signalling a tighter policy stance. Financial markets currently price in a high probability of a rate hike in June, with expectations of two increases largely factored in.
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