U.S. inflation data and Treasury auctions are approaching, global assets face a directional choice

This week, the global financial market will face a critical "inflation test," with multiple data releases regarding U.S. price pressures. At the same time, the U.S. Treasury will hold two important bond auctions. These factors combined will pose a severe challenge to the recent upward trend in global stock markets.

"Inflation Week" officially kicked off on Monday. According to the latest inflation expectations survey from the New York Federal Reserve, respondents expect the inflation rate over the next 12 months to be 3.2%, down from 3.6% last month, marking the first decline since October of last year. This "soft data" releases some positive signals.

However, the market's focus will be on the upcoming "hard data" to be released on Wednesday, specifically the U.S. Consumer Price Index (CPI) for May. According to FactSet, the overall CPI year-on-year growth rate is expected to rise from 2.3% in April to 2.5%; the core CPI, excluding food and energy, is expected to increase from 2.8% to 2.9%.

Additionally, the Producer Price Index (PPI) for May will be released on Thursday, with the market expecting a year-on-year growth rate of 2.6%, slightly up from 2.4% in April. The University of Michigan's consumer inflation expectations survey will conclude the week on Friday.

Market volatility risks are heightened as the Federal Reserve has entered a "quiet period" ahead of next week's interest rate decision meeting, during which officials are not allowed to make public comments. This means that despite the unexpectedly strong non-farm payroll data released last Friday, which fueled concerns about rising inflation, there will be no officials providing verbal guidance this week.

Jay Woods, Chief Global Strategist at Freedom Capital Markets, warned that if the CPI data comes in higher than expected and shows a persistent inflation trend, "it will pour cold water on this stock market rebound." This could force the Federal Reserve to delay interest rate cuts or even reconsider rate hikes to achieve the 2% inflation target.

In fact, the current stock market rebound is remarkable. The MSCI Global Index hit a record high on Monday, while the S&P 500 index also broke through 6000 points in early trading, rebounding over 20% from the "Liberation Day" low on April 8.

In the bond market, investors also need to closely monitor this week's U.S. Treasury auctions. The Treasury will begin issuing a total of $97 billion in three-year and ten-year bonds starting Tuesday, followed by a $22 billion auction of thirty-year bonds on Thursday. The yields on ten-year and thirty-year bonds are currently close to critical levels, with the former near 4.5% and the latter approaching 5%. The subscription enthusiasm in the market will reflect investors' judgments on inflation risks and expectations regarding the Trump administration's fiscal policies.

The Senate Finance Committee is expected to release revisions to the Republican tax reform bill this week. This bill is projected to add an additional $2.4 trillion to the federal budget deficit over the next decade.

The current yield on the 10-year U.S. Treasury bond is 4.478%, up 12 basis points from last week; the 30-year yield is at 4.951%. Giuseppe Sette, co-founder of Reflexivity, noted, "The Treasury bond market has recently become the focus of the market, especially after last month's heavyweight fiscal bill drew widespread attention." If this week's inflation data falls short of expectations, or if the tensions in China-U.S. trade ease, it may drive the bond market up and yields down, providing support for the current portfolios that are sensitive to macro narratives.

Chris Larkin, the trading chief at E*Trade under Morgan Stanley, stated that although this week's inflation data will stir market nerves, the latest developments in China-U.S. trade negotiations may play a more critical role in the coming weeks.

He pointed out, "Against the backdrop of generally weak economic data last week, the stock market continued to rise, indicating that investors are tolerant of a moderate economic slowdown." However, "if there are no significant surprises in the inflation data, the market sentiment's barometer will quickly shift to the progress of China-U.S. negotiations."