US sharemarkets ended the week sharply lower after red-hot US inflation data derailed hopes that inflation may have peaked and set up a decisively hawkish tone ahead of this week’s FOMC meeting.

The ASX200 closed at a four-month low. Sellers savaged the banking sector after the RBA commenced a more aggressive rate-hiking cycle and as Australian consumer confidence fell to its lowest level since mid-August 2020 as a result of rising cost-of-living pressures.

Here are the top five things to watch in markets this week.

1. FOMC to raise rates by 50 basis points

The FOMC meets on Thursday and will deliver a second consecutive 50 basis-point hike to take the cash rate from a range of 0.75 per cent to 1 per cent, to a range of 1.25 per cent to 1.5 per cent.

The surprisingly high May inflation data means the accompanying statement will be hawkish and reiterate that inflation is unacceptably high.

2. Australian labour force report

The labour force report for May is due to be released on Thursday. The market is looking for a 25,000 rise in employment and for the unemployment rate to decline from 3.9 per cent in April to 3.8 per cent in May.

3. Bank of England to raise rates

The Bank of England meets on Thursday and is expected to hike rates from 1 per cent to 1.25 per cent. However, as inflation in the UK last clocked in at 9 per cent year on year, a 50 basis-point rate hike cannot be ruled out.

4. Bank of Japan to stay dovish

The BOJ is expected to leave rates unchanged at -0.1 per cent and to continue to buy 10-year JGBs when necessary to keep rates at the 0.25 per cent cap.

The continuation of the Bank of Japan’s (BoJ) dovish policy up against the hawkish Federal Reserve should help USDJPY – the foreign exchange between the US dollar and the Japanese Yen – reach 140 Yen in the months ahead.

5. More pain for the big banks?

The financial sector plunged 9 per cent last week closing at 5960 on concerns over rising interest rates, slowing growth and a softer housing market. The financial sector needs to rebound back above roughly 6050 to avoid a deeper decline.

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