May PPI Surges

MACRO FRAME

Global equity markets continue to remain focused on US-Iran peace negotiations and a potential reopening of the Strait. Core inflation offers a reassuring print that energy-linked inflation has yet to make its way into broader price pressures.

STOCK INDEX FUTURES

Equity index futures were modestly higher overnight, though the Nasdaq was little changed ahead of the SpaceX market debut today; the company is valued at $1.8 trillion after its IPO yesterday. The major indexes all surged yesterday after President Trump canceled plans to strike Iran and signaled that peace talks were ongoing. Oil prices fell as traders reinforce expectations of a peace deal between the US and Iran and expect a reopening of the Strait. Brent crude futures were down 4.3% to $86.52 bbl WTI dropped 4.5% to $83.78 bbl. Yesterday’s PPI data for May showed that prices rose +1.1% MoM, and on a 12-month basis, PPI jumped +6.5% YoY, the largest annual gain since November 2022’s +7.4%. The core reading rose +0.8% MoM, the biggest single-month move since March 2022, and +5.1% YoY to mark the hottest 12-month print since October 2022’s +5.5%. The data has reinforced expectations that the Fed will remain on hold for the remainder of the year, with traders still favoring a move upwards by December.

Equities remain broadly supported by earnings upgrades, particularly in semiconductors where AI‑driven demand has pushed profit expectations sharply higher. Recent weakness has highlighted how narrowly the rally is concentrated in just a handful of crowded AI and tech names. At the same time, index gains rest increasingly on optimistic earnings assumptions, one‑off mega‑cap gains, and policy‑related tax tailwinds, leaving markets historically expensive on long‑term metrics and vulnerable if growth, cash‑flow conversion, or tech capex discipline disappoint, especially with performance dispersion near COVID‑era and dot‑com extremes and the S&P 500’s advance since late February almost entirely driven by AI stocks.

Watch point: While May’s softer core CPI print reduces the urgency for additional Fed tightening and should be welcomed by equities, core inflation remains above target, suggesting policy will stay restrictive and reinforcing the case for selectively adding some defensive positioning alongside exposure to the ongoing tech‑led momentum.

CURRENCIES

US DOLLAR: The USD index is little changed at 99.85 after falling sharply  on Thursday, following President Trump’s announcement of a potential peace deal between the US and Iran. The geopolitical bid remains the dominant factor in price direction for the dollar. Further evidence/details of a peace deal and reopening of the Strait are likely to direct flows away from the dollar; signs of a breakdown in negotiations and a resumption of fighting will further safe have demand for dollar liquidity. While This week’s inflation data saw a strong headline surge, the core print for CPI likely offers enough ammunition for policymakers at the Fed to delay a near-term move upwards in rates. However, further evidence that underlying inflationary readings are moving higher alongside the strong move upwards in producer prices marks a worrying signal for members at the Fed. Traders will need to refer to upcoming PMI surveys for signals on if firms are passing the rise in costs onto consumers. Money markets are now fully priced for a hike by December.

Watch point: Demand for dollar liquidity remains heightened amid the flare up in hostilities, while May’s jobs report has provided the greenback with stronger support, potentially sustaining a break above into a higher range.

EURO: The euro is little changed at $1.1571. The European Central Bank revised its inflation forecasts higher and its growth projections lower yesterday after it raised rates by 25 bps to 2.25%. The ECB now expects headline inflation to reach 3.0% in 2026 (up from 2.6%). Core inflation was raised to 2.5% for 2026, from a previous estimate of 2.3%. GDP projections were lowered slightly, forecasting an expansion of 0.8% in 2026 (down from 0.9%). Money markets expect one more rate hike from the central bank this year, coming in September, and are no longer pricing a third hike following in 2027, a significant repricing after President Trump’s announcement. A potential limiting factor for policy tightening, would be the easing in services inflation in the most recent data. Still, the ECB maintains the scope to tighten policy without worrying about impacts to economic growth, though the extent to which policy tightening is necessary may be limited to just June’s hike if the Strait is reopened within the month and if services inflation does not pick up. For the euro, broader risk sentiment will continue to determine price direction, while the interest rate differential against the dollar remains unfavorable given the recent shift in Fed expectations.

Watch point: While a June rate hike was expected from the ECB, a peace deal and restoration of oil flows through the Strait is likely to reduce further tightening expectations.

BRITISH POUND: Sterling is little changed at $1.3407. Traders have largely shrugged off soft GDP data out of the UK, which showed the economy contracted 0.1% in April. Traders are likely look past the data in hopes that the latest Iran deal will prove more durable and alleviate downside risks to growth.  Next week could be key in determining the near-term direction of UK markets, as politics will come back into the focus in a local election that could result in contention of Prime Minister Starmer’s position.

JAPANESE YEN: The yen weakened 0.26 to 160.18 yen per dollar. Intervention risk remains front of mind for traders as the currency remains above the 160 level. Bank of Japan Governor Ueda was hospitalized on Wednesday and will miss next week’s policy meeting. The BoJ may feel pressure to hike, but with policy rates still deeply negative in real terms, incremental moves are unlikely to deliver a durable yen rebound or materially change Japan’s still-fragile exit from deflation. Instead, markets are increasingly focused on the broader policy mix: rising long yields alongside a weak currency highlight concerns over Japan’s heavy debt load, while political support for a weaker yen, equity benefits from FX depreciation, and reluctance to tackle the debt overhang suggest any sustained yen strength will require more than rate hikes alone. With a June rate hike pretty much fully priced in, yen weakness is likely to persist even despite a move upwards.

Any further depreciation in the yen is likely to be met with warnings from Japanese officials and raises the risk of official intervention. Traders are likely not willing to challenge official buying from the Bank of Japan or Japanese Treasury, though not excited to take up bullish positions either. The market sees a total of 46 bps of tightening by year-end. Intervention risk continues to offer the currency support around the 160 level.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.7047, recovering from its fall below the 0.70 support level yesterday as the recent news between the US and Iran lifted risk-sentiment. The NAB recently called off their expectation of another rate hike from the Reserve Bank of Australia, saying they expect a slowdown in the economy to limit price growth. Meanwhile, a mix of softer economic data has led markets to pare back expectations of another rise in the RBA’s policy rate. Still, demand is largely outpacing supply, labor conditions remain tight, leaving the inflation bias pointed upwards. The RBA has broadly signaled that it is in a wait-and-see mode following three rate hikes earlier this year and as a result markets are no longer any hikes by the end of the year. However, the trimmed mean measure of inflation sits at an annual pace of 3.4%, which is likely to reinforce a tightening bias from the RBA.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to keep the RBA on a tightening path.

TREASURY FUTURES

Yields are little changed across the curve. Notably, the two-year has fallen below 4.10% for the first time in a week, while the 10-year has dropped below 4.5% in response to yesterday’s developments. While peace expectations offer some support to bond markets, expectations for Fed policy are little changed and bond markets would need to see a sizeable drop in oil prices and ensuing inflation readings to bring yield close to pre-war level. Recent inflation data has reinforced a hawkish-leaning hold, but removed any immediate urgency to move rates higher. Markets price near-certainty on a June hold, but expectations of a hike later in the year remain largely unchanged from this time last week. For now, price pressures have proven relatively transitory without presenting a durable second-round impulse. If core CPI prints above 3.0% annualized in coming readings, that argument becomes hard to sustain, particularly given that intermediate-stage pipeline pressures remain intense, with processed goods up +13.3% YoY and unprocessed goods up +22.2% YoY, the hottest upstream readings since 2022. The Treasury market has largely been pricing this scenario with the 2-year yield above 4% and the 10-year near 4.5%. Substantial curve flattening has been consistent with market sentiment repricing the front end for hikes rather than cuts.

Watch point: The path to tightening has become more evident though Wednesday’s inflation data offers relief for concerns of immediate policy tightening. Traders will look for evidence that price pressures have become more broad based as a gauge on policy expectations.

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