Inflation in focus as markets remain resilient

This week CPI and PPI are going to be firmly in the spotlight as markets are increasingly focused on whether inflation is proving more persistent than expected, particularly as energy prices remain elevated and AI-related investment continues to create strong demand for labor, semiconductors and industrial inputs.

 
Last week’s jobs data alone may not justify further tightening, but it strengthens the argument that the Fed can afford to remain restrictive. With expectations for a rate hike by year-end rising sharply over the past week, inflation data now has the potential to either reinforce or challenge that repricing.

Geopolitics is adding another layer of uncertainty. Renewed exchanges between Iran and Israel over the weekend initially pushed oil prices sharply higher as traders rebuilt some geopolitical premium into energy markets. However, crude has since given back some of those gains as investors assess whether the latest flare-up represents a broader escalation or another episode within a conflict that remains largely contained. Importantly, negotiations between the US and Iran have not completely broken down, meaning markets are still balancing the risk of further disruption against the possibility of an eventual diplomatic resolution.

The result is a market that appears to be transitioning from a one-way rally to a more balanced and volatile environment. The long-term drivers behind the bull market — strong earnings growth, AI investment and resilient economic activity — remain intact. However, after a rally that pushed the Nasdaq more than 30% higher in just over two months, investors are becoming more sensitive to inflation, interest rates and geopolitical risk. Rather than signalling the end of the uptrend, the recent volatility may simply reflect a market that is rediscovering two-way price action after a prolonged period of optimism. The key question now is whether upcoming inflation data validates the higher-for-longer narrative or gives investors confidence that the recent pullback was simply a healthy consolidation within a broader bull market.
 

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