Weekly market commentary

More volatility ahead

Inflation volatility gauged in standard deviation, 1995-2025

The May US CPI rose less than expected last week, yet monthly data has been volatile since the pandemic. See the chart. Noisy economic data reflect the volatile new regime we’ve long noted. We expect this to persist. Wage pressures remain too high for inflation to settle at the Fed’s 2% target, with the gap between core and wage inflation near its widest in four years. The data showed signs of tariffs starting to lift consumer prices, like for appliances, but the full impact is still to come. Surveys by the National Federation of Independent Business suggest companies are ready to hike prices in response to tariffs, but they may delay that and workforce changes as they await clarity on tariffs. Longer term, we see ongoing inflation pressure from mega forces like the AI buildout, aging populations and geopolitical fragmentation. Latest example: the Israel-Iran conflict and potential oil price rises.

US growth hasn’t been immune to volatility, with quarterly data going from holding up to contracting in the past year. Evolving US trade policy is one source of uncertainty, yet hard economic rules – like how supply chains cannot be rewired quickly without disruption – act as a constraint, as we’ve seen in US-China trade talks and other tariff rollbacks. That’s why we keep our risk-on stance and an overweight to US stocks on a tactical six- to 12- month horizon, supported by mega forces like AI. The S&P 500 is back near its February record high as trade tensions cool, LSEG data show. We brace for more policy-driven volatility as the US floats plans for setting tariffs unilaterally before the 90-day pause ends on July 9.

Challenges for central banks

We see uncertainty around the economic impact of tariffs and inflation volatility keeping the Fed on hold for now – including at this week’s meeting. Longer term, persistent inflation pressures from tariffs and a tight labor market will likely limit how far the Fed can cut, even if tariff-driven supply disruptions dent growth. We think long-term US bonds yields can rise, keeping us underweight. We prefer inflation-linked bonds, even if they are yet to reflect long-term inflation pressures, in our view. On a strategic horizon of five years and longer, we like private credit as returns for debt with floating interest rates have risen with rates. We favor infrastructure equity, like stakes in airports and data centers: its returns are buffered from inflation and it outperforms amid supply constraints and high inflation. Private markets are complex and not suitable for all investors.

We think tariffs and any sustained oil price rises from the Israel-Iran conflict could leave other central banks facing weaker global growth. Should the conflict affect the security of critical trade routes, supply disruptions could add to inflation pressures. The European Central Bank (ECB) cut rates this month but signaled a pause ahead, even after lowering its 2025 growth projections. Greater fiscal spending could boost growth in time, but execution is key. We think the ECB has more room to cut as wage pressures and energy prices cool, and tariffs likely aren’t inflationary for Europe. We still prefer European to US investment grade and high-yield credit. That preference has served us well, but we keep an eye on relative valuations.

Our bottom line

Volatile economic data, like the CPI, is reinforcing our view that we are in a regime of greater macro volatility. We think the Fed will keep rates steady as it waits for tariff impacts to materialise. Mega forces keep us overweight US stocks.

Market backdrop

Global stocks slid last week after Israel launched a large-scale attack on Iran’s nuclear and missile infrastructure, as well as its military and scientific command. Europe’s Stoxx 600 fell 1.7%, while the S&P 500 and Japan’s Topix index retreated about 0.5%. Crude oil futures surged over 11% last week, briefly hitting a five-month high after news of the attack broke. US 10-year Treasury yields slid about 10 basis points over the week to 4.41% but remain 50 basis points above their April lows.

All eyes are on global central bank meetings this week – but we don’t expect any policy rate changes. We think tariff uncertainty and inflation pressures from labor supply constraints will keep the Federal Reserve on hold. We are watching for comments from the Bank of England on the weak growth outlook. And any escalation in the Middle East will be key to track as potential disruptions to energy supplies or infrastructure could have a bigger market impact.

Read our past weekly commentaries here.

Big calls

Our highest conviction views on six- to 12-month (tactical) and over five-year (strategic) horizons, June 2025

Tactical granular views

Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2025

We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2025