OUR SUMMARY
Markets have adjusted their outlook on US inflation, factoring in the impact of tariffs, with inflation swaps now forecasting a year-end CPI of 3.55%, up from 2.94% in March. This comes as the current US CPI stands at 3%. However, this rise in inflation expectations contrasts with interest rate swaps, which are pricing in 90 basis points of cuts this year. With inflation projections climbing, it’s possible that market expectations for rate cuts may have been overly aggressive. If these expectations shift toward fewer cuts, the US dollar could see gains.
Equities adopted a risk-off stance overnight, following the implementation of reciprocal tariffs across roughly 60 countries and a dramatic 104% tariff on China by the US. This led to a sell-off in US Treasuries and the US dollar. However, there is a recovery in equities this morning.
The European trading session is expected to be quiet, with little on the calendar. The focus will shift to the release of the Fed minutes in the evening. However, given the recent tariff announcements, the minutes may not offer much new insight, as they likely reflect an outdated economic landscape.
