Yields fell despite inflation fears; equities declined broadly. Tesla surged. Energy led sectors. Dollar weakened, oil jumped on Middle East tensions. Gold rose; Bitcoin slipped but stayed above $100,000.

Yields declined across the curve over the past week, with both short- and long-term maturities ending lower. However, safe-haven flows into government bonds were tempered by renewed inflation concerns arising from escalating geopolitical tensions. Notably, the sharp increase in the 10-year yield on Friday underscores the atypical behaviour of U.S. government debt in the current environment. This dynamic unfolds against the backdrop of continued Israeli strikes on Iran and heightened geopolitical uncertainty, which continues to weigh on global markets and the broader economy. Despite these tensions, U.S. Treasuries are on track to register $163 billion in inflows this year — the third-highest annual total on record.

Equity markets also retreated over the week. Large-caps declined 0.40%, while small- and micro-cap equities posted steeper losses of 1.40% and 2.30%, respectively. The "Magnificent 7" managed a modest gain of 0.85%. Tesla shares outperformed, advancing nearly 14% amid a perceived de-escalation of tensions between Donald Trump and Elon Musk. Musk continues to reposition Tesla's corporate narrative, shifting focus from traditional automotive production toward leadership in robotics, artificial intelligence, and autonomous mobility. Sector performance was mixed, with energy leading gains, rising more than 5.50%.

In currency and commodities, the U.S. dollar weakened 1.40% against the euro, with the euro reaching its highest level since 2021. The downward trend in the dollar persists. WTI crude oil jumped nearly 13% following Israel's attacks on Iran, stoking fears of potential supply disruptions in the Middle East. Gold advanced 3.65%, extending its safe-haven rally amid ongoing geopolitical instability. Bitcoin remained above the $100,000 threshold but closed the week down 4.73%.

US inflation softened in May with easing service prices; consumer sentiment improved 16% but remains cautious due to tariff-related inflation risks and ongoing concerns about economic stability.

US inflation softened in May, with headline and core CPI rising just 0.1% month-on-month, below expectations. Annual headline CPI remained steady at 2.4%, while core CPI eased slightly to 2.8%. The core “supercore” services inflation measure—excluding housing—stayed near its lowest level since 2021, signalling moderation in service sector price pressures. Prices for key categories like apparel, new vehicles, and airline fares declined, while shelter inflation remained moderate. Despite this softness, tariff-related cost pressures could push headline CPI closer to 4% by Q3, though these effects are expected to be transitory. Disinflationary forces such as a cooling labour market and easing shelter costs support a cautious Fed stance. Consumer sentiment rose 16% in June, improving across all demographics, yet it remains about 20% below December 2024 levels. Inflation expectations fell, but concerns about tariffs and economic risks persist, keeping consumer confidence guarded.

US inflation softened in May; services inflation slowed, supercore near 2021 lows. Tariff risks loom, but disinflationary forces persist, keeping Fed in wait-and-see mode.

US inflation data for May surprised to the downside, with both headline and core CPI rising just 0.1% month-on-month, below consensus forecasts of 0.2% and 0.3% respectively. On an annual basis, headline CPI remained at 2.4% YoY, in line with expectations, while core CPI eased slightly to 2.8% YoY, just below the 2.9% forecast. The core “supercore” measure — core services excluding housing — rose slightly to 2.86% YoY in May, though it remains near its lowest levels since 2021, reflecting a continued moderation in underlying services inflation. On a year-over-year basis, service sector cost pressures are decelerating, while goods prices are stabilising or increasing only very modestly. Key categories such as apparel (-0.4% MoM), new vehicles (-0.3% MoM), and airline fares (down for a fourth consecutive month) helped restrain price pressures, while shelter inflation remained moderate at 0.3% MoM. Despite the benign May data, risks remain on the horizon: the Fed’s Beige Book notes many businesses plan to pass on higher input costs — largely tariff-related — within the next few months, which could push headline CPI closer to 4% YoY by Q3. However, these tariff-driven increases are expected to be transitory and will gradually roll off the annual comparisons by late summer 2026. Meanwhile, disinflationary forces persist, with indicators such as the Cleveland Fed’s new tenant rent index pointing to further softening in shelter inflation, and a cooling labour market potentially helping to contain wage-driven service inflation. Against this backdrop, the Federal Reserve is likely to remain in a data-dependent wait-and-see mode as it assesses both near-term upside risks and the underlying disinflationary trends in the broader economy.

We expect inflation to rise modestly short term due to tariffs, but disinflationary trends in services, housing, and labour will likely keep the Fed cautious and data-dependent.

Consumer sentiment rose 16% but remains below December 2024 levels. Inflation expectations declined, though concerns persist over trade policy’s potential inflationary impact and broader economic risks across multiple sectors.

Consumer sentiment improved for the first time in six months, rising 16% from the previous month but remaining approximately 20% below December 2024 levels, when sentiment had experienced a post-election boost. This improvement was consistent across all demographic and regional segments, including age, income, wealth, political affiliation, and geography. All five index components recorded gains, with particularly sharp increases in both short- and long-term expectations for business conditions, reflecting a perceived easing of pressures stemming from earlier tariff hikes. While consumers appear to have partially adjusted to the initial shock of the steep tariffs announced in April and the subsequent policy volatility, they continue to perceive significant downside risks across multiple economic dimensions, including business conditions, personal finances, durable goods purchasing, labour markets, and equity markets—all of which remain well below December 2024 levels. Despite this month’s notable rebound, consumer outlook remains cautious regarding the broader economic trajectory. Meanwhile, year-ahead inflation expectations dropped sharply from 6.6% in the previous month to 5.1%, and long-run expectations declined for a second consecutive month, easing from 4.2% in May to 4.1% in June—both the lowest readings in three months. Although concerns about the inflationary impact of tariffs have moderated somewhat, expectations remain elevated relative to the latter half of 2024, reflecting persistent apprehension that trade policy could continue to exert upward pressure on inflation over the coming year.

We expect consumer sentiment to remain cautiously optimistic, with recent improvements tempered by ongoing concerns over economic risks and the potential inflationary effects of trade policy in the coming year.