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This week’s data is anticipated to show a rise in US inflation for May, highlighting the emerging impact of President Donald Trump’s tariffs.
According to economists surveyed by Reuters, consumer prices are expected to increase by 2.5 percent annually when figures are released on Wednesday, up from 2.3 percent in April. Core inflation, which excludes unstable food and energy prices, is predicted to rise to 2.9 percent from 2.8 percent the prior month.
The upcoming inflation report should significantly reflect the impact of Trump’s tariffs, which analysts believe will heighten price pressures.
“Tariffs are likely to have a more noticeable effect on the data than last month, where the most evident evidence of price hikes driven by tariffs was the 8.8 percent monthly surge in audio equipment,” commented analysts at Bank of America. They also noted that a seasonal drop in vehicle prices might limit the overall boost in goods inflation.
An increase in inflation may lead the Federal Reserve to hold off on reducing interest rates for the foreseeable future. Fed governor Adriana Kugler on Thursday supported keeping the current rates, citing ongoing inflation risks from tariffs that may continue to push prices up until 2025. To add, Philadelphia Fed president Patrick Harker indicated that the Fed is likely to maintain its rates during the upcoming meeting.
After unexpectedly positive employment results on Friday, traders reduced expectations for rate cuts this year. Currently, the market estimates a slight chance of the Fed lowering borrowing costs just once before the year concludes, though two cuts remain the primary expectation. Katie Duguid
Are wage pressures in the UK easing?
UK labor market data released on Tuesday will provide insight on wage pressures — an essential factor influencing future Bank of England interest rate decisions — following recent increases in employers’ national insurance contributions and the national living wage.
Economists polled by Reuters predict that annual wage growth, excluding bonuses, will decrease to 5.4 percent for the three months ending in April, down from 5.6 percent in the previous period. Philip Shaw, an economist at Investec, expects the decline to be sharper, estimating it at 5.3 percent.
“The higher NICs will likely apply some downward pressure on wage growth as employers may have made greater efforts to manage staffing costs,” he stated. He also forecasts a slight uptick in the unemployment rate to 4.6 percent, from 4.5 percent, aligning with general expectations.
This aligns with findings from the BoE’s Decision Maker Panel survey, which, as of Thursday, indicated weakening wage growth — both realized and anticipated — for the three months leading to May.
Additionally, analysts expect a contraction of 0.1 percent in GDP for April when data is released on Thursday, following a surprising 0.2 percent growth in March, which raised growth to 0.7 percent in the first quarter of the year.
Indicators pointing to a slowing economy and reduced wage growth could support the argument for further rate cuts this year. However, if the data reflects stability in output and employment levels, policymakers may choose a more cautious route. Currently, markets are predicting one or two cuts by the end of the year. Valentina Romei
Can emerging market currencies maintain their strong performance?
This year’s weakness of the dollar has favored emerging market currencies, leading investors to question whether this positive trend can continue into the latter half of the year.
Among the best performers on a spot return basis are Eastern European currencies like the Hungarian forint, the Czech koruna, Bulgaria’s lev, and the Polish zloty, each gaining over 10 percent year to date, benefiting from their EU membership and floating currency arrangements.
On a total return basis, which includes earnings from high local interest rates, Brazil’s real outperforms all other emerging currencies.
“Central banks in emerging markets have wisely kept their policy rates significantly above inflation compared to a decade ago,” stated Grant Webster, who manages emerging market bonds and foreign exchange portfolios for Ninety One. “Emerging markets are much less dependent on US dollar inflows for funding [and] are reaping the benefits of a terms-of-trade improvement as oil prices decline and the value of their exports increases.”
However, not all analysts find these currencies appealing. “We remain structurally bearish on HUF [Hungarian forint] due to] expansionary fiscal policies leading into next year’s elections, concerns regarding auto tariffs, and a strained relationship with the EU,” noted analysts at Deutsche Bank in a recent report. Alan Livsey
