Here come the central banks

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Now that the North Korean summit is finished, attention turns to major central bank meetings on both sides of the Atlantic. Both are expected to push interest rates higher.

The U.S. Federal Reserve gets things started at 2 p.m. ET today. Forecasts across the board expect a 25 basis point increase in the upper band of its target range to 2 percent. Number-crunchers point to a stream of positive economic numbers recently. For example, May’s non-farm payroll growth beat estimates and unemployment fell to an 18-year low. One report even found there are more vacant jobs in need of an employee than all the ranks of unemployed workers.

Manufacturing reports from the Institute for Supply Management and regional Fed branches in New York and Philadelphia also surprised to the upside last month — in part thanks to accelerating orders. There’s even evidence that the trade deficit, a weight on GDP for a generation, is starting to shrink.

Interest rates have climbed gradually since late 2015, but they still remain near long-term lows following the 2008-2011 financial crisis. While normally policymakers hike rates to slow inflation, their main goal now is to “normalize” borrowing costs. That way they’ll have room to cut them the next time a recession hits.

Conventional wisdom says higher rates are good for banks, financials and domestic small-caps. But it’s hard to know how much of that news is priced in, and how traders will react to statements after the meeting.

The European Central Bank meets the next day morning, and is following a similar path. It’s looking to wind down “quantitative easing,” which involves buying bonds to depress rates. Its chief economist strongly implied at a June 6 press conference that policymakers want to start ending the program, even though Europe’s struggled recently.

Press conferences will follow both central bank meetings, which could generate volatility for traders.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.