US double bill By Reuters

A look at the day ahead in European and global markets from Tom Westbrook

Markets are likely to stay tentative through Europe’s morning hours ahead of a blockbuster session in the U.S., where inflation data is due out in the morning before the Federal Reserve meets to set rates and publish its economic projections.

It’s likely to overshadow final German CPI numbers and Britain’s monthly GDP figures due in the London day.

Economists expect U.S. headline inflation steadied at an annual 3.4% in May. If it’s much hotter than that it will not be well received by equity markets perched at record highs, particularly if it seems to reverse the cheered cooling notched in April.

Markets expect the Fed to leave interest rates on hold and so the focus will be on the economic projections and how Chairman Jerome Powell explains them at his press conference.

On rates, the Fed’s median projection at the March meeting was for three cuts this year. That is likely to change in response to sticky inflation and a strong economy.

Markets currently price about 40 basis points of rate cuts in 2024. So if the median projection were to fall to just one 25 bp cut it would be a blow, while zero would be super hawkish.

A lot may depend on how Powell frames it: Do fewer cuts this year mean more next year, or not? In March, Fed policymakers saw longer-run interest rates between 2.4% and 3.8%, as they had in December. But the median projection ticked up from 2.5% to 2.6%.

In March just one policymaker expected long-run rates below 2.5%, down from five a year earlier. If those projections start creeping up it could derail the bond rally that was already jolted by last week’s surprisingly strong jobs report.

In the Asia day, China’s consumer price index fell 0.1% in May from a month earlier, disappointing forecasts, as price wars exacerbate deflationary pressure in the world’s second-biggest economy.

Japan’s wholesale inflation jumped in May at the fastest annual pace in nine months, as the weak yen added upward pressure on prices. The data complicates the Bank of Japan’s decision, on Friday, on how soon to raise interest rates.

Overnight implied volatility for dollar/yen spiked to its highest in six weeks as traders strapped in for the ride.

Key developments that could influence markets on Wednesday:

-US CPI

-Federal Reserve meeting

-German final CPI, UK monthly GDP estimate

(By Tom Westbrook; Editing by Christopher Cushing)