Attention this week is likely to fall most firmly on the US economy - both in the short term with new inflation numbers, and in the long term thanks to ongoing nervousness in the bond market.
Inflation and rates: the Fed vs The White House
This week, we will receive US inflation figures for May. The data will be closely examined for any indications that Trump's tariffs are pushing up prices. So far, those fears have not materialised, but experts have suggested that the effect of tariffs will only show up in data from the second half of the year.
Inflation for May is predicted to remain too elevated for the US Federal Reserve (Fed) to contemplate reducing interest rates at present, although some analysts foresee a potential slowdown in services inflation.
The Fed is now widely anticipated to maintain rates in June and July, with opinions divided regarding its decision in September. Certain analysts suggest that a rate reduction might not occur again until early 2026.
That would not please the US President who has publicly insulted the chairman of the Fed Jerome Powell, as well as claiming he would name his successor soon, and has called for an immediate full-point rate cut. US President Trump was further emboldened last week by the latest jobs figures which showed hiring across the US economy slowed last month, with fewer jobs created than initially thought in both March and April.
According to the latest non-farm payroll report, the US added 139,000 new jobs in May, while the unemployment rate remained steady at 4.2 per cent. Economists had anticipated an increase of 130,000 jobs, so the figures were slightly above expectations. However, the report also revealed that 95,000 fewer jobs were created in March and April than previously estimated.
Stock markets took this to be good news overall - perhaps reasoning that it would hasten rate cuts. The S&P 500 rose more than 1% on June 6 leaving the index back above 6,000 points.
Bonds: trouble ahead?
News from the other major market - bonds - is less optimistic. Yields on US Government bonds rose on the back of the jobs data.
The 10-year Treasury yield rose above 4.5 per cent The 2-year yield rose above 4 per cent, while the 30-year bond yield advanced to just below 5 per cent. And it is the longer-dated bonds which are of growing concern to investors. Sentiment is due to be tested again on Thursday when an auction of 30-year Treasuries takes place.
For the first time in nearly a generation, governments are encountering pushback from the market when attempting to sell long-term debt. Investors’ concern is less that they won’t get their money back - and more that bonds are likely to be available at higher yields in the future.
This hesitation among investors has driven 30-year government borrowing costs in major economies to their highest levels in decades. This has raised concerns about debt sustainability, with the growing expense of paying interest on debt now putting spending in other areas at risk.
In the US, lawmakers are working to pass Trump’s ‘One Big Beautiful Bill’ that will increase the deficit in the world’s largest economy by US$2.4trillion over the next decade. The danger, as argued by figures such as Elon Musk and JPMorgan Chase CEO Jamie Dimon, is that bond markets demand ever higher returns from Governments, leading to debt repayments that cripple economies.
