Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

Happy Friday! Here are the highlights, and my predictions for what next week might have in store. 

If anyone wanted a snapshot of the tight spot the U.S. economy and policymakers are in right now, they got it on Friday via the University of Michigan's latest consumer sentiment and inflation expectations survey.

The results were eye-popping: consumer sentiment expectations are now the lowest since 1980 and one-year inflation expectations are the highest since 1981, above 6%.

Sentiment surveys are only 'soft' data and there is much debate whether they translate into the 'hard' activity data like retail sales and hiring. Fed Chair Jerome Powell said earlier this month the link between the two in recent years has been "weak" and he has previously downplayed the U-Mich inflation expectations figures. 

But the direction of travel is getting harder to ignore. Consumers are spooked by President Donald Trump's trade war and fear tariffs will push up prices, forcing them to curtail spending. If this soft data filters into the hard data, the economy could be in the grip of 'stagflation' later this year.

This calls into question the sudden optimism that washed across financial markets following the US-China trade truce. It's hard to believe it's been less than a week since the world's two largest economies agreed to reduce reciprocal tariffs and put them on pause for 90 days. 

The speed with which economists raised their growth forecasts on the detente, and the scale of the rally across financial markets, was pretty remarkable considering the damage from tariffs has yet to be felt and the amount of uncertainty that is still hanging. 

But markets brushed all that aside and ended a remarkable week on a strong footing. The S&P 500 and Nasdaq rallied 5% and 7%, respectively, to their highest in two months, and the Nasdaq is up 30% since April 7. The Dow's rebound means it has recouped its 'Liberation Day' losses and is now flat for the year. 

Other markets have moved a lot too. Germany's DAX hit a record high and is also up 30% from the April low, the MSCI World index has risen in 17 of the last 19 sessions, and safe-haven gold fell 4%, its steepest weekly loss this year.

The U.S. and European earnings season is drawing to a close, and although some big firms pulled guidance or issued profit warnings due to the tariff uncertainty, results and the outlook were broadly positive. 

Renewed growth optimism, therefore, would appear to be partly behind the rebound in bond yields. Fed rate cut expectations and projections for further Chinese stimulus have been pared back, pushing up bond yields in both countries and beyond. 

But U.S. fiscal worries are also brewing, and on Friday Republicans rejected President Donald Trump's tax package because it didn't go far enough on spending cuts. Watch this space.

Underscoring how difficult it is to make economic forecasts in these highly uncertain times, this week threw up some big data surprises - unexpectedly strong UK GDP growth in the first quarter, weaker-than-expected GDP in Japan, and the steepest fall in U.S. producer prices since 2009. 

You wouldn't bet against similar surprises next week.

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Here are some of the best things I read, watched and listened to this week: 

I wrote earlier this week on why the 'Global South' may stand to benefit if the era of 'U.S. exceptionalism' and the world economic order of the last several decades are drawing to an end. 

The Global South (ex-China) carries all the investment risks associated with emerging markets, but boasts attractive demographics, strong growth rates, and is rich in natural resources. It punches well below its weight in financial market terms, so should investors be increasing their exposure? 

One chart that surfaced this week suggests that ball is already rolling, at least in equities. What's more, the momentum behind it looks pretty strong too. Is a paradigm shift underway?