Investors are getting ready for another key week coming up. They’re particularly focused on inflation, new ongoing trade talks, and consumer sentiment data coming out. This series of reports has led some to believe that inflation expectations have skyrocketed. By May, single digit, one-year estimates of price increases hit 6.1%- 6.6%, more than doubling peak levels seen during the inflation crisis of 2022. Core Consumer Price Index (core CPI) is expected to increase by 0.3% in May. This increase is more than a little uptick from the 0.2% increase reported for April, raising alarm over what this might mean for the Federal Reserve’s response.
The new fiscal realities create a new, complicated backdrop for investors. In particular, surging inflation could lock the Federal Reserve into high interest rates and borrowing costs. If the core CPI comes in higher than 0.4% m/m, that would be bullish for the US Dollar while bearish for US stocks and gold prices. A core CPI figure of 0.2% or lower would place downward pressure on the dollar. On one hand, it would help equity markets rally and drive up the demand for gold.
Inflation Expectations Under Close Scrutiny
Market analysts are obsessed with inflation expectations, and for good reason in all but the headline numbers. The Nonfarm Payrolls report was a double-whammy of the positive as it demonstrated a strong job market. In response, it has pushed back expectations for the first cut to September. Investors are especially keen to know how incoming inflation data will impact the monetary policy trajectory going forward.
The Federal Reserve’s monetary policy decisions are based on a wide range of economic factors, but inflation continues to be a top priority. If inflation remains elevated, the Fed could delay interest rate cuts. This decision would further worsen the already bleak economic outlook for consumers and small businesses alike. Adding to the uncertainty is the deadline of July 9 for all of President Donald Trump’s reciprocal tariffs. As written, these tariffs will increase costs on thousands of consumer products.
Trade Tensions Affecting Market Sentiment
Those high-stakes United States-China trade talks hang heavy over the week as well. As negotiations continue behind-closed doors, a key context looms large. China maintains a tight grip on the supply of critical minerals needed for EV batteries, as well as many other manufactured products. That bilateral dependence has deepened racial tensions between the two countries. Both parties are feeling the heat to find a deal during a time of unprecedented economic uncertainty.
Also of interest are the legal proceedings surrounding Trump’s tariffs. With court cases still pending, there’s not much incentive for America’s trading partners to make concessions without a definitive ruling. In April, baseline levies of 10% were levied on nearly all goods. Consequently, businesses are already increasing costs in order to preemptively offset future tariff effects. The ripple effects of these developments may have a big impact on market performance.
Consumer Confidence Data on the Horizon
While markets are certainly looking for new inflation statistics, focus will be placed on the US Consumer Confidence data, expected for June. Economists had forecast only modest gains in the preliminary numbers. This is up from May’s final reading of 52.2, a strong indication that consumers are feeling cautiously optimistic. Consumer confidence vs inflation The balance between consumer confidence and inflation will be key economic indicators in determining economic outlooks.
Business is not easy right now as companies work to adapt and respond to changing economic signals. They called for the addition of 139,000 jobs before all of this. The week ahead is sure to be a big one, with inflation numbers and consumer sentiment data likely to change the market dynamics.