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Figures this week are expected to show a pick-up in US inflation in May as the effects of President Donald Trump’s tariffs are beginning to appear in the data.
Economists polled by Reuters are forecasting a 2.5 per cent annual rise in consumer prices when the numbers are released on Wednesday, up from 2.3 per cent a month earlier. Core inflation, which strips out volatile food and energy prices, is also expected to show an acceleration to 2.9 per cent last month, from 2.8 per cent in April.
The inflation report is expected to be the first to substantially reflect the effects of Trump’s tariffs, which economists anticipate will add to price pressures.
“Tariffs should have a broader impact on the data than last month, where the clearest sign of tariff-driven price hikes was the 8.8 per cent month-over-month spike in audio equipment,” said analysts at Bank of America. They added that a fall in vehicle prices due to seasonal factors is likely to prevent a larger overall increase in goods inflation.
An uptick in inflation is likely to discourage the Federal Reserve from cutting interest rates any time soon. Fed governor Adriana Kugler on Thursday expressed support for maintaining the current level of rates, citing elevated inflation risks due to tariffs, which she said may continue to exert upward pressure on prices throughout 2025. Also on Thursday, Philadelphia Fed president Patrick Harker suggested that the Fed was likely to keep rates steady at its upcoming meeting.
Following better than expected employment data on Friday, traders in the futures market scaled back bets on rate cuts this year. Markets are now pricing a small chance that the Fed reduces borrowing costs just once before the end of the year, although two cuts is still the central expectation. Katie Duguid
Are UK wage pressures easing?
UK labour market figures on Tuesday will shed some light on wage pressures — a key factor for upcoming Bank of England interest rate decisions — following April’s rise in employers’ national insurance contributions and the national living wage.
Economists surveyed by Reuters expect annual wage growth excluding bonuses to ease to 5.4 per cent in the three months to April, down from 5.6 per cent in the previous period. Philip Shaw, economist at investment bank Investec, expects a sharper slowdown to 5.3 per cent.
“Higher NICs will, if anything, also have put some downward pressure on wage growth as employers probably made extra efforts to contain staff costs,” he explained. He also expects the unemployment rate to edge up to 4.6 per cent, from 4.5 per cent previously, and in line with the consensus.
That would chime with the BoE’s Decision Maker Panel survey, which on Thursday pointed to softer wage growth — both actual and expected — in the three months to May.
Meanwhile, forecasters expect GDP to have contracted by 0.1 per cent in April when the data is published on Thursday, after an unexpected 0.2 per cent rise in March, which boosted growth to 0.7 per cent in the first three months of the year.
Signs of a faltering economy and moderating pay could strengthen the case for further rate cuts this year. But if the data points to resilience in output and jobs, policymakers may opt for a more cautious approach. Markets are at present pricing in one or two cuts by year-end. Valentina Romei
Can the strong performance of emerging markets currencies continue?
Emerging market currencies have been among the main beneficiaries of this year’s dollar weakness and investors will wonder if the rebound can continue in the second half of this year.
On a spot return basis, the best performers have been eastern European currencies such as the Hungarian forint, the Czech koruna, Bulgaria’s lev and the Polish zloty which have climbed more than 10 per cent year to date. All have benefited from their EU memberships and separately floating currencies.
On a total return basis, including income from high local interest rates, Brazil’s real tops all emerging currencies.
“EM central banks have prudently kept their policy rates well above inflation compared to a decade ago,” said Grant Webster, who oversees emerging market bonds and foreign exchange portfolios for Ninety One. “EMs are far less reliant on US dollar flows to finance themselves [and] are benefiting from a terms-of-trade boost as oil prices fall and the value of their exports rise.”
Not all of these currencies look attractive to analysts. “We remain structurally bearish on HUF [due to] expansionary fiscal policy into next year’s election, risks associated with auto tariffs and a poor relationship with the EU,” wrote Deutsche Bank analysts in a recent note. Alan Livsey
