Week Ahead: US-China trade talks, US CPI, Michigan consumer sentiment, UK unemployment, GDP 

Weekly Recap

US stocks closed higher for a second straight week, with the Nasdaq gaining 2.1% and the Dow Jones up 1.17%. Both are now joining the S&P 500 in positive territory for the year. 

Technology stocks outperformed after increased sentiment surrounding AI following several positive earnings updates. Trade also remained a key focus after President Trump and China’s President XI Jinping held a phone call, which resulted in a positive conclusion for both. This gave the market some hope that issues could be resolved. 

Last week’s key data point was the US non-farm payroll report, which showed that the labour market is cooling but at a slower pace than feared. The US added 139k jobs, ahead of the 130k forecast, while unemployment remained at 4.2%. Stocks and treasury yields rose after the data, as did the USD. 

In Europe, the DAX rose to a record high, and the EUR gained after the ECB cut rates by 25bps to 2%. President Christine Lagarde said that the easing cycle had nearly concluded. 

Headline risk 

Headlines could continue to drive volatility this week. Any further details regarding trade tariffs will be watched closely. At the start of the week, US-China trade talks will restart after stalling a few weeks ago. Any signs of progress could help lift the market mood, particularly after weak Chinese inflation and trade data at the start of the week. Chinese exports slumped to 4.8% growth in May, down from 8.1%, and factory gate inflation fell to -3.3% in May, down from -2.7% in April.  

Safe havens like Gold could come under pressure if the talks move the two sides towards a trade deal. 

UK jobs report (Tuesday) 

Expectations are for the unemployment in the three months to April to rise to 4.6%, up from 4.5%, while headline wage growth is expected to remain at 5.5%. The data will show the shakeout following Labour’s payroll tax increases in April. Meanwhile, the Bank of England will watch wage growth carefully as it remains too high to be consistent with inflation cooling back to the 2% target rate. Policy makers will want to see wage growth cooling before becoming more aggressive with interest rate cuts. A 25 basis point cut is not priced in until November, with a total of 40 basis points of cost seen by the end of the year. 

GBP/USD trades around multi-year highs. However, cooling jobs data could pull GBP/USD lower. 

US CPI (Wednesday)  

US inflation will be the main focus this week. Expectations are for US CPI to rise 2.5% YoY in May, up from 2.3% in April. Core CPI, which excludes more volatile items such as food and fuel, is forecast to rise to 2.9% YoY, up from 2.8% in April. While this would only indicate a slight uptick in inflation, the concern here is that there could be worse to come, particularly given the higher import costs due to Trump’s tariffs as they work their way along the supply chain. Hotter than expected inflation would be a key event risk for next week, particularly in light of data last week, which showed signs of the US labour market weakening and could raise fears of stagflation in the US. This scenario could be bearish for the US dollar.  

USD/JPY could fall if US CPI comes in hotter than expected, as the USD weakens amid fears for the economy’s outlook. Meanwhile, the yen could benefit from safe-haven inflows. 

UK GDP (Thursday)  

The UK economy recorded stronger than expected growth in the first quarter of the year, with GDP expansion of 0.7% in Q1, stronger than the 0.6% expected. However, the strong growth was not expected to continue across the year owing to the turmoil caused by Trump’s trade tariffs. In April, GDP is expected to rise 0.1% month on month following a 0.2% month on month expansion in March. The data comes after the OECD downwardly revised UK economic growth by 1% next year as Trump’s trade tariffs bite. The data comes after Bank of England governor Andrew Bailey stated last week that the central bank would be sticking with a gradual and careful approach to cutting rates.  

Weak data could drive rate cut optimism, which could help lift the FTSE towards its record high. The FTSE has recorded four straight weeks of gains, its best run since the start of the year. 

German CPI (Friday) 

German inflation is expected to confirm that consumer prices cooled to 2.1% YoY in May, down from 2.2% in April. This is a second reading, so it doesn’t tend to be as market-moving as the preliminary reading. However, a downward revision could put pressure on the euro. Last week, the ECB cut interest rates by 25 basis points to 2%, and ECB president Christine Lagarde noted that the central bank was nearing the end of its rate-cutting cycle. In addition to German inflation data, investors will also be watching ECB speakers across the week for any further clues on when the ECB could end its rate-cutting cycle. 

EUR/USD is trading above 1.14. No change in German CPI and hawkish ECB officials could lift EUR/USD towards 1.15. 

US consumer sentiment & inflation expectations (Friday) 

Investors will be looking to see whether US Michigan consumer sentiment shows any signs of recovering after sinking to its second-lowest level on record in May. Trump’s erratic trade policies raised fears that people could start to lose their jobs. Whilst recent data has pointed to a softening in the labour market, it hasn’t collapsed. That said, it is still early days.  

Michigan confidence is expected to improve to 53.5 from 52.2. Meanwhile, long-term inflation expectations have also been ticking higher as Trump’s trade policies are expected to increase prices. The 1-year inflation expectation was at 6.6% in May, its highest level since 1981, while the 5-year outlook was elevated at 4.4%. At these levels, Trump’s policies could have an enduring impact on US prices.  

Weak sentiment and rising inflation expectations could weigh on the S&P 500, which is currently trading just shy of its record high. 

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