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We are entering a big central bank week, with rate decisions from the US Federal Reserve, the European Central Bank and the Bank of Japan. It seems highly likely that the ECB will deliver another 25bp rate hike, but the Fed outlook is a bit more uncertain. We expect that this will be the first FOMC meeting since January 2022 where there is no rate hike, but market pricing is not ruling out a hike on Wednesday.

Central banks in both Australia and Canada hiked rates in the past week, with Canada’s hike being especially surprising. It was the first increase in the country’s overnight rate since January, taking it to its highest level in 22 years and sending market rates higher also in the US and Europe.

In the US, the job report for May was clearly stronger than expected in terms of payroll growth, but also showed increasing slack in the labour market from an increasing work force and slowing wage growth. Also, jobless claims were higher than expected this week. In our view, the Fed can afford to pause rate hikes now. Just before the decision next week, we will get the CPI for June, where we can see monthly inflation decline to just 0.2%, also reducing the need for further hikes. Apart from the rate decision, we will also get projections from FOMC members, and there is chance that they will point towards a hike in July.

The ECB has quite clearly signalled that there will be a 25bp rate hike on Thursday which is also fully priced by markets, and an end to APP reinvestment from July. We will get new staff projections and policy signals at the meeting. With the current market mood focusing on signs of decreasing inflation, the market could react strongly on dovish signals from the ECB, while hawkish tones are more likely to be ignored. In the hawkish direction, though, new data show a 5.2% y/y increase in wages in Q1 measured as compensation per employee, the ECB’s preferred measure.

We expect the Bank of Japan to tweak the yield curve control at one of the upcoming meetings. Widening of the yield curve control band to e.g. +/-100bps can be explained as a move to improve market functioning, but will essentially be tightening. We still deem it most likely that the BoJ will stay put at the Friday meeting, though.

In China, producer prices declined 4.6% y/y, the biggest decline since 2016. This puts further downwards pressure on consumer prices, which are barely increasing in China and it is possible that we will get more central bank easing. Credit data will be out during the coming week and could be key to watch.

The Turkish lira weakened significantly this week as local banks stopped intervening. Hopes are building up that Erdogan's newly appointed economic team would soon take steps towards normalizing policies. This week's move in the lira can perhaps be seen as an 'intentional devaluation' as opposed to a full loosening of controls. In the absence of interventions, we think there is still room for significant lira depreciation until the central bank credibility is restored and we see interest rate hikes.

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