Week Ahead: Can the ‘most unloved rally’ to continue to record highs?

Markets have kicked off the week with US stock futures in the red. This comes after a credit rating downgrade by Moodys late on Friday. But the question many are asking is if the strong bullish momentum in the recent risk rally will continue and take US equities to new all-time highs soon. The huge wave of relief in markets on the US-China tariff truce and climbdown has pushed the benchmark S&P 500 to within 3% of the February record top at 6,147. Its recent outperformance is likely to persist as US companies are the biggest beneficiary of the cuts in levies. There are also arguments that this is a short squeeze – when negative bets bail out and are forced to reverse their positions – which can continue.

However, this astonishing rally does feel very unloved by a lot of Wall Street, with the mood much darker than markets suggest. Current China tariffs are roughly 30%, which is still above where most predicted at the beginning of the year. More broadly, economists reckon the average tariff the US is charging across everything it imports globally is now around 13%. That leaves the world’s biggest economy with the highest trade taxes since the 1940s. They are likely to push US inflation higher and growth lower in time, which leaves many scratching their heads about why stocks aren’t lower.

Data-wise, this week sees China release a batch of figures which could show the impact of the peak escalation of trade tensions. The RBA will cut rates, which is fully priced in by money markets. This would be only the second move in the cycle, a gradual path similar to the BoE. The Board may highlight their fear of easing too much and prematurely, which it thinks could unleash renewed inflation risk. Otherwise, muted growth is expected across most PMI data, with a mild contraction in the UK. These figures have previously remained stronger than feared amid the trade war uncertainty. GBP watchers will also contend with rising inflation data on Wednesday, which historically has printed hotter than expected.

In Brief: major data releases of the week

Monday, 19 May 2025

– China Data: Retail sales are expected to edge higher to 5.0% y/y though consumption is still weak versus pre-pandemic levels. Industrial production is seen easing to 6.4% y/y and fixed asset investment is predicted to remain broadly steady around 4.3%. Recent trade talks have lowered downside risks.

– EU-UK Summit: This reset of relations is set to feature a new security and defence partnership, as well as an agrifood deal. There may some limited exceptions to dynamic realignment as UK PM Starmer and EC President von der Leyen attempt to resolve difference around youth mobility and fishing rights.

Tuesday, 20 May 2025

– RBA Meeting: The cash rate is expected to be cut by 25bps to 3.85%. The most recent key core inflation reading printed within the RBA’s 2-3% target range for the first time since 2021. Focus will be on the updated forecasts and the bank’s views on risks to the outlook.

Wednesday, 21 May 2025

– UK CPI: The headline rate is expected to jump to 3.3% from 2.6%. Core is seen rising two-tenths to 3.6% but services is predicted to remain steady below 5%, which is the MPC estimate. Annual service-sector price increases are the chief reason for rising inflation. The BoE see CPI moving to 3.7% by September.

Thursday, 22 May 2025

– Global PMIs: The composite readings in the eurozone and UK are forecast to come in above and below the expansion/contraction 50 mark respectively. The 90-day US-China tariff truce may ease some trade uncertainty, but fragile demand could persist. 

Disclaimer: The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our client. No representation or warranty is given as to the accuracy or completeness of this information and therefore it shouldn’t be relied upon as such. Any research provided does not have regard to specific financial situations, needs or investment objectives. Vantage accepts no responsibility for any use that may be made of these comments and for any consequences that result. Consequently, any person acting on it does so entirely at their own risk. We advise any readers of this material to seek professional advice where necessary. Without the approval of Vantage, reproduction or redistribution of this information isn’t permitted.