Fed Expected to Signal Slower Rate Hikes

This week's Federal Reserve meeting isn't expected to offer much insight into the remote possibility of another interest rate hike this summer, but it could deliver a sobering message about policymakers' expectations regarding slower growth and lower rates in the next few years.

"Faced with continued sluggish growth, little sign of a pickup in productivity" and persistently tepid wage growth, "policymakers are likely to reassess" the longer-term path of rate increases, Morgan Stanley reported. In total, the research firm expects Fed officials to drop their forecast for the federal funds rate at the end of 2018 from three percent to just 2.4 percent. Likewise, the 3.3 percent long-term forecast is expected to be decreased to just three percent.

For investors this week, short term events are likely to take primary focus. Following a government report of anemic average job gains over the past two months, which effectively squashed any real chance of a rate increase ahead of this week's Fed meeting, all eyes are on the British referendum vote scheduled for June 23. If Britain votes to withdraw from the European Union, additional market turbulence is expected moving forward.

With job gains of just 80,000, Fed Chair Janet Yellen confirmed that a June hike was no longer on the table. She went on to add, however, that the labor market continues to give signs of improvement, pointing toward an unemployment rate below five percent. Still, policymakers are looking for solid employment reports before moving forward with lifting rates, and a number of events would need to occur to clear the way for a possible rate increase in July. These include strong job gains in June, upward revisions in May, and a vote for the U.K. to remain in the EU.

Analysts aren't expecting much insight regarding July plans to be revealed after this week's meeting, as the Fed will look to keep its options open. Despite feeble first quarter economic growth, many economists still expect to see two rate increases this year stemming from an accelerating economy and job growth approaching 200,000. In recent speeches, Yellen and other policymakers have added more confusion to the proceedings, lamenting slow productivity growth and wage growth in the face of a low unemployment rate.

Morgan Stanley predicts longer run growth projections for 2017 and 2018 will be lowered from two percent to 1.9 percent. In total, the firm suggests policymakers could project as few as three rate hikes in 2017 and 2018.

Retail Sales Exceed Projections in May

A recent slowdown in hiring had little effect on the spending of U.S. shoppers last month, as the Commerce Department said that retail sales rose a seasonally-adjusted 0.5 percent in May, the second straight increase following a 1.3 percent jump in April. While these figures mark strong progress from the weak start to 2016, slowdowns in job growth have raised concerns regarding the immediate future. Hiring slowed to 38,000 in May, down from monthly gains that exceeded 200,000 in recent years.

"The strength of the May retail sales report should provide plenty of comfort to those concerned that the recent slump in payrolls would be followed by a downturn in activity," Steve Murphy, U.S. economist at Capital Economics, told Yahoo.

The strong hiring figures of recent months continued to comfort Americans in the face of slowing job growth last month, as ecommerce sales and restaurant dining growth outpaced total retail sales, which continue to be hampered by an ongoing shift away from department stores and shopping malls. Online and non-store purchases rose 1.3 percent in May. Sporting goods stores, restaurants, clothiers and auto dealers enjoyed a similar sales spike. Gas station spending also rose on the back of the recent jump in fuel prices. However, sales declines impacted building material stores, furnishers and department stores.

Currently, consumer spending is up about 2.5 percent from a year ago. Additional growth will depend on the willingness of consumers, a group upon which 70 percent of all U.S. economic activity depends, to become less restrained in their spending following the Great Recession. Unemployment rates as low as 4.7 percent have yet to remove this hesitancy. Falling gas prices have played a role in boosting consumer spending, but the rebound of oil prices will likely somewhat reverse this effect moving forward.

U.S. Stocks Fluctuate as Brexit Looms

U.S. stocks fluctuated to start the week, with the S&P 500 Index falling to a near three-week low as growing uncertainty regarding the U.K.'s possible exit of the European Union weighs on investors' minds. This concern is compounded by the ongoing Federal Reserve meeting, which will end on Wednesday.

"It was nice to see a good retail sales number, but folded on top of that you have Brexit, speculation around the Fed and the market still near some highs," Richard Sichel, chief investment officer at Philadelphia Trust Co., told Bloomberg. "That's causing investors to remain cautious. The news cycle has been taken over by what the Fed is going to do."

The current selloff occurs just days after the S&P 500 climbed to its highest level in nearly 11 months, driven by optimism that low rates, consistent job gains and modest growth would support rising stock prices. However, recent developments in the EU have investors reassessing that sentiment. Britain's largest-selling newspaper now backs the country's exit from the EU, and a number of independent polls put the 'Leave' campaign in the lead. The potential global fallout from this move has markets increasingly unsettled.

Movement of the S&P 500 has been volatile in recent weeks, with the index climbing 16 percent from a 22-month low in February to within 0.6 percent of an all-time high before its most recent slide. Still, the CBOE Volatility Index, which measures market turbulence, is poised to extend gains for a seventh day, marking the longest streak since December 2013. All eyes will be on Fed Chair Janet Yellen's commentary on Wednesday, as analysts attempt to predict when the next rate hike can be expected.

"Brexit is adding fuel to the fire for risk-averse investors," Jasper Lawler, an analyst at CMC Markets Plc in London, told Bloomberg. "Markets are already worried about slowing global growth and the inability of central-bank policy to stem the decline. Global growth concerns are present because we don't know where the Fed is on that, but depending on the language they use, this could cause the market to gain again."

Job Losses in Oil Continue to Mount Despite Rebound

Oil prices have posted a strong rebound in recent weeks, but the oil industry is still suffering from the effects of low prices. By the end of 2016, it's expected that low oil prices will have cost the United Kingdom about 120,000 jobs, according to a study by industry group Oil & Gas UK. The oil industry will employ about 8,000 fewer workers than in 2014, according to the report, but the effects are far-reaching, with tens of thousands of jobs supported by the industry expected to vanish.

"The industry has been spending more than it is earning since the oil price slump towards the end of 2014," Deirdre Michie, chief executive of Oil & Gas UK, told CNN. "This is not sustainable and companies have been faced with some very difficult decisions."

At its peak in the middle of 2014, the British oil industry included roughly 450,000 jobs, while Brent crude was trading at double its current price of $50 per barrel. That figure is expected to drop to 330,000 by the end of 2016. Royal Dutch Shell has already cut 12,500 positions globally since the start of last year, and BP has also announced layoffs.

While $50 crude may not have energy companies overly excited, it still marks an impressive rebound of nearly 100 percent from the February low. With recent supply disruptions in Nigeria, Canada and Colombia limiting supply, prices are expected to continue climbing in the months to come. The new Saudi energy minister recently stated that he expects prices to hit $60 a barrel by the end of this year.

MSCI Could Add China Mainland Shares to Emerging Market Index

Major stock index firm MSCI is set to announce a decision later today on whether it will add Chinese shares to its prominent emerging markets index. If it includes them, U.S. investors could be getting their hands on shares that trade in China as early as next year. Currently, all Chinese shares listed on the emerging market index are traded in either Hong Kong or the U.S., meaning that the world's second-largest economy currently makes up about a quarter of the benchmark index. With full inclusion of A shares, this ratio will exceed one-third.

As recently as last June, MSCI rejected the addition of Chinese shares, citing uncertainty about who owns the shares and how easily investors can withdraw their money from Chinese investments. However, some analysts suggest that recent market reforms in China could be enough to get them included on the emerging markets index. Issues surround transparency and access could still be a deciding factor, though. The most recent example relates to China's stock market crash last year. Some of its stocks have been suspended for months following the crash.

"There are still some worries about voluntary suspensions," Ian Hui, a global market strategist at JPMorgan Asset Management, told CNBC in an email. "Overall, I think it's possible for inclusion to be announced this month, but the house view is that it's more likely happening within the next 1 or 2 years, since there are still some lingering issues."

Also worthy of note to MSCI's decision is last week's announcement that China will give the United States a high ceiling on how much it can invest in Chinese assets using yuan that are traded outside the Mainland. Analysts viewed the announcement as a positive gesture to further open the channel of U.S. investment in Chinese assets while increasing overseas use of the yuan. The 250 billion yuan ($38 billion) quota trails only Hong Kong in size.

"This will support the competitiveness of the U.S. financial and corporate sectors and improve U.S. investors' access to China's onshore capital markets," U.S. Treasury Secretary Jack Lew said in a release following China's announcement.