The week ahead: US CPI, UK spending plans and high hopes for Apple

Financial markets felt  the effects of the better-than-expected US jobs report for May last week. The US economy created 139k jobs last month, which defied some expectations for jobs growth to crash due to US trade policy. This news was greeted by a stock market rally in the US. The S&P 500 rose by 1%, the Nasdaq rose by 1.2% on Friday, and by 2.1% last week. US blue chip stock indices outperformed European indices, however, small caps are making a comeback. The Russel 2000 rose by more than 3% last week, as the impact of tariffs are yet to show up in the hard US economic data.

Asian stocks are rallying at the start of the week; however, European equity futures and US futures are taking a breather and are pointing to a slightly lower open later today. The S&P 500 is currently pointing to an open below the 6,000 level later today. Stocks may need a new driver to extend last week’s rally after investors  scaled back their expectations for Federal Reserve interest rates cuts for this year. There are less than 2 cuts priced in by the Fed Fund Futures market by the end of this year. The number of rate cuts from the Fed could be determined by the outlook for US inflation, which is released later this week. As the growth data remain unaffected by tariffs for now, inflation could hold the key for US monetary policy.

Tech is key for market sentiment

For now, US stocks are being led higher by the tech sector. Nvidia is outperforming the S&P 500 and the equal weighted S&P 500, and this may continue while the growth outlook is neutral and as the tariff rhetoric has been dialed down. News over the weekend suggests that the US and China will resume trade talks in London on Monday, with the issue of concern China’s dominance in rare earth minerals. Rare earth shipments from China to the US have slowed since President Trump’s ‘Liberation Day’ tariffs in April. The US wants these shipments to be reinstated, while China wants the US to rethink  immigration curbs on students, restrictions on access to advanced technology including microchips, and to make it easier for Chinese tech providers to access US consumers.

The outcome of these discussions will be crucial for market sentiment at the start of this week. A trade agreement between China and the US could calm fears about the economic fallout from US tariff plans, although it is still worth noting that an agreement between the US and the EU is conspicuous by its absence.

US bond auction to test investor appetite for Trump’s ‘big beautiful bill’

This is a big week for the US bond market. On Thursday, there will be an auction of 30-year US Treasuries. Long term US bonds have been unloved in recent months. US 30-year Treasury yields have risen by 37bps in the past 3 months. A 20-year bond auction 3 weeks ago, which had lacklustre demand, triggered a selloff in US bonds, and a surge in yields. The 30-year yield is still hovering near the 5% mark at 4.96%, this is adding to funding pressure for the US government, which is trying to avert a debt crisis as the debt limit nears, and is trying to pass a huge Budget that could add trillions to the national debt. The bid-to -cover ratio, along with the yield investors demand to buy the debt, and foreign demand at the auction will all be watched closely. Thursday’s bond sale will be driven by market sentiment. If risk appetite remains strong, then the auction may go well. But if trade talks with China go badly then we could see weak demand for US debt and risk sentiment may sour.

The FX view  

The dollar is also in focus this week, after experiencing a turnaround last week. The US dollar was the second-best performing currency last week, behind the Canadian dollar, while the yen and the Swiss franc sold off. There remains barriers to a long-term recovery in the USD, including a poor bond auction that pushes up US Treasury yields. The dollar is weaker on Monday. USD/JPY has backed away from the 145.00 level at the start of this week, and EUR/USD is back above $1.1400.

Markets are likely to be sensitive to the outcome of the US/ China trade talks, along with any development in the Elon Musk/ Donald Trump spat that sent Tesla shares plunging last week. Tesla shares managed to recoup nearly 3.5% of their 14% loss on Friday, however, this suggests that a permanent political risk premium has been added to Tesla’s share price, which could limit its upside in the medium term, and has led to a shift in the leadership of the Magnificent 7.

Below are three events that are worth watching in the week ahead:

US CPI

We believe that most Fed officials will be preoccupied by inflation rather than growth, since the US economy is not showing signs of stress because of US trade policy, as highlighted by the jobs report at the end of last week. US CPI will be released on Wednesday, and analysts expect prices to tick up slightly. The headline rate is expected to rise to 2.5% from 2.3%, while the core rate is expected to rise to 2.9% from 2.8%. The monthly figures will be more useful to see if recent tariff changes are impacting on price pressures for the consumer. Economists expect the month-over-month CPI rate to rise by 0.2% for headline prices and 0.3% for core prices. The monthly rate of core price growth could be considered problematic if it comes in at 0.3%, as this is a rapid pace of price growth in the short term.

This month’s report is expected to show the impact from Trump’s tariffs, especially in goods prices. Apparel, furniture and car parts could all see large price upswings, as imports get hit with at least a 10% tariff rate, for steel and aluminum this is now 50%. As trade agreements are reached in the coming months, the risk is that tariff rates for the US’s trading partners could move higher than 10%, which would add even greater pressure to inflation down the line.

There is an argument to be made that core inflation may defy consensus and come in weaker than expected in May, as weaker demand for services weighs on price growth, however, goods prices are likely to remain in focus due to the tariff effect.

Signs of inflation pressure could knock risk sentiment, and it may even limit dollar upside, especially if it threatens the US’S 30-year Treasury auction on Thursday.

UK spending review and GDP report

The highlight for the UK this week will be the spending review, which will be announced on Wednesday. The Chancellor is expected to announce increases in spending for the NHS and defense, while making cuts to other budgets, including benefits. Police, pensioners and potentially families could all get extra cash this year, so it leaves little room for much-needed spending cuts. The risk is that the bond vigilantes come out of hiding if they do not like what they hear. Thus, we expect the Chancellor to talk tough about spending restraint, and even if she is eventually forced to ditch her fiscal rules, which won’t come this week.

An already high tax burden that could overwhelm efforts to boost UK growth is another challenge facing the chancellor. An inability to cut spending or raise taxes is one of the UK’s big fiscal conundrums. The bond market is also sensitive to any new debt issuance, so we expect the Chancellor will be sensitive to the vagaries of the bond market when she announces the spending review this Wednesday. UK 10 and 30-year bond yields are already higher than US yields of the same maturity, so the Chancellor needs to ensure this spending review does not upset the delicate balance in the UK bond market.

This week’s UK labour market report along with the GDP reading for April will also be crucial for the Chancellor. If the labour market and growth show signs of weakness, then the Chancellor could be forced to cut spending even more. The market is expecting the UK economy to have created 50k jobs in the three months to April, and for the unemployment rate to have ticked up a notch to 4.6%. Wage growth is also set to moderate, which could give the BOE the green light to cut interest rates in August. There is currently a 60% chance of an August rate cut, this could rise if we get weak UK labour market data. It could also take the shine off GBP/USD, which is above $1.3500 at the start of this week.

April GDP is expected to have contracted by 0.1% MoM; however, the quarterly rate is expected to remain steady at 0.7%. The weakness in the April GDP report is likely to be attributed to the confusion in the immediate aftermath of the US trade tariffs. This caused a temporary pause on production in some UK industries as the outlook for exports was too uncertain. Since then, the UK has reached a trade agreement with the US, and we expect growth to bounce back later this year.

Apple

The tech giant will also be in focus this week as it is holding its annual Worldwide Developers Conference on Monday. The market is waiting to hear from CEO Tim Cook, who could announce a new AI strategy for the company, which is considered a laggard in the AI race, especially vs. the rest of Magnificent 7. Aside from Tesla, Apple has consistently underperformed the rest of the Magnificent 7 for most of this year, partly due to its lacklustre AI strategy. It has also been hit hard from Trump’s tariff policies since China is a main production hub for the company.

Apple has a track record of designing new features and creating mass market tech products, so hopes are high that it can embed AI features or create an AI-infused product to its global, loyal customer base. If investors like what they hear this week, then it could see the stock regain the crown of the world’s most valuable company from Microsoft.

Apple’s share price rose 1.5% last week, as a general rally in tech lifted Apple, there may also have been some buying ahead of the Developers Conference. However, Apple’s share price is still lower by 18% YTD, so there is room for a recovery if the conference can enthuse investors about Apple once again.