The week ahead: Central banks in focus amid hot labor market data
Last week concluded with strong employment reports from the US and Canada, which significantly reshaped market expectations regarding monetary policy. The next five days promise an equally busy agenda—several key central bank decisions and critical US inflation data.
Bank of Canada — Wednesday
The Bank of Canada is expected to keep its rate unchanged. The regulator is balancing several conflicting factors: negotiations on reviewing the USMCA agreement are scheduled for July, the conflict in the Middle East is pressuring energy prices, and the Canadian economy has formally entered a technical recession. At the same time, Friday's employment report—87,800 new jobs against a forecast of 10,000—somewhat changed the picture and gave the regulator more room to maneuver if rates need to be raised.
The minutes of the last meeting indicate a split within the governing council: some fear inflationary pressure due to the Iranian conflict, while others emphasize growth risks if new American tariffs are imposed. Markets are pricing in a 15.6 basis point hike by year-end, although Bank of America considers this excessive and expects the rate to remain unchanged until December.
US Inflation — Wednesday and Thursday
The two most important macroeconomic indicators of the week will be released consecutively. On Wednesday—the Consumer Price Index (CPI) for May, and on Thursday—the Producer Price Index (PPI).
The consensus forecasts an acceleration of CPI to 4.2% year-over-year from the previous 3.8%, with a monthly increase of 0.3%. The core index, excluding energy and food, could rise to 2.9% year-over-year. The Cleveland Fed's model provides a slightly higher benchmark for core CPI—0.46% month-over-month. Citi analysts, conversely, are below consensus, expecting a slowdown in housing inflation and modest growth in core goods prices.
This data will be particularly significant given the strong employment report: markets are already pricing in a 25 basis point Fed rate hike by year-end. Thursday's PPI data will allow for a more accurate modeling of the May core PCE—this indicator is precisely what the Federal Reserve considers its primary benchmark for decision-making.
ECB — Thursday
A 25 basis point increase in the deposit rate—to 2.25%—is practically a foregone conclusion. The updated macroeconomic forecasts, which will be published alongside the decision, will unequivocally reflect higher inflation forecasts and lower growth forecasts—the only question is the scale of the adjustments. The current pan-European inflation level of 3.2% already significantly exceeds the ECB's baseline forecast for 2026 of 2.6%, approaching the "adverse scenario" of 3.5%.
The key at Lagarde's press conference will not be the decision itself, but signals regarding future actions. Some council members and market analysts view the June move as "insurance"—a one-off measure, not the start of a new tightening cycle. The official stance, however, will likely remain data-dependent with an emphasis on preserving options for maneuver.
Context: Last Week's Outcomes
The backdrop for all these decisions is formed by events that unfolded throughout the week. The situation around the Strait of Hormuz escalated again—US actions against vessels violating the maritime blockade of Iranian ports provoked retaliatory rocket and drone strikes and subsequent American airstrikes on Iranian military infrastructure. Negotiations between Washington and Tehran have effectively stalled, despite Trump's assurances of a "final stage" of agreements. Hezbollah rejected the American-Israeli peace plan on the Lebanese front, complicating a broader settlement.
On the economic front, the ISM Manufacturing PMI rose to 54.0 points in May, and ISM Services to 54.5, indicating the continued resilience of the American economy despite geopolitical turbulence. Pan-European HICP inflation accelerated to 3.2%, confirming the need for a June ECB rate hike.