As we look toward the week starting May 10, the focus remains on geopolitical nut markets, which are also debating whether central banks will follow the market’s hawkish lead or if a reality check is overdue.
This makes for interesting viewing and will likely lead to significant market movement.
US: The Fed’s Final Changing of the Guard
The coming week is a momentous one for the Federal Reserve. Not only do we face critical data points, but we also mark a transition in leadership. Jerome Powell is set to conclude his tenure as Fed Chair, with Kevin Warsh scheduled to take the reins on Friday, May 15.
On the data front, Tuesday’s Inflation report is the headliner. We are bracing for a second consecutive 0.9% MoM print at the headline level, largely fueled by the surge in gasoline and diesel prices. While the core reading is expected at a more modest 0.3%, the annual rate could push up to 2.7%. The Fed has recently made a concerted effort to talk up rate expectations, ditching their previous easing bias as the US economy continues to hold up better than its peers. However, with labor supply growth effectively stalled due to collapsing net migration (projected at near zero this year), the “hot” jobs numbers we’ve seen may be less a sign of strength and more a symptom of a tightening supply constraint.
UK & Europe: A Strange Case of Mispricing
Across the Atlantic, the Bank of England (BoE) and the European Central Bank (ECB) find themselves in different boats, though markets are currently pricing them as if they are in the same storm.
Markets are pricing in a significantly more hawkish path for the UK than the Eurozone—a move that looks overdone. While the UK is energy-dependent, this is not a repeat of the 2022 gas crisis; natural gas prices remain relatively contained compared to the spike in oil. We believe the ECB is actually more likely to deliver on its hawkish rhetoric in June, whereas the BoE may view “not cutting” as enough tightening for now. Watch the Euro and Sterling closely as this pricing discrepancy begins to unwind.
Asia: Inflation Fallout and Trade Tensions
In Asia, the focus is squarely on the fallout from the Middle East through the lens of inflation.
- China: We are looking for trade data on Saturday and inflation data on Monday. Exports are expected to grow by roughly 6.5%, but the real story lies in the PPI, which is accelerating. Markets will be hyper-sensitive to how China handles the impact of higher energy costs and the lingering effects of the “Liberation Day” tariffs.
India: Expect a modest rise in inflation. While gasoline prices remain capped by the government, the second-round effects of oil prices are starting to bleed into food costs, which could test the Reserve Bank of India’s patience.