Market outlook for the week of 25th-29th May

Monday starts off quietly, with no major scheduled economic events for the FX market. Many countries in Europe and the U.K. will have a bank holiday while the U.S. will observe Memorial Day.

On Tuesday, Japan will release the Bank of Japan core CPI y/y, while the U.S. will get the CB consumer confidence index. Wednesday brings inflation data from Australia along with the RBNZ monetary policy announcement.

On Thursday, the market's attention will be on the U.S., where key releases will include the core PCE price index m/m, preliminary GDP q/q, durable goods orders m/m, and new home sales data.

Finally, on Friday, Japan will publish the Tokyo core CPI y/y, while Canada will release GDP m/m data. Throughout the week, several FOMC members are expected to deliver remarks, while month-end rebalancing flows could also influence market activity.

In Australia, the consensus for CPI m/m is 0.6%, compared to the prior 1.1%. CPI y/y is expected at 4.4%, down from 4.6%, while trimmed mean CPI m/m is projected at 0.3%.

The inflation data released in March did not fully capture the impact of the Middle East conflict on fuel prices, but this week’s figures should provide a clearer picture of whether these cost pressures are starting to spread more broadly across the economy.

Westpac analysts expect headline CPI to rise by 0.9% in April, pushing annual inflation up to 4.8%. The main drivers for the increase are seasonal factors, including holiday travel and higher clothing and footwear prices. However, some of the upward pressure could be offset by lower transport costs, supported by the temporary fuel excise cut and free public transport measures introduced in some states.

Core inflation is also expected to edge higher, with Westpac's monthly trimmed mean forecast at 0.4%, leaving the annual rate at 3.5%.

In terms of monetary policy, the RBA remains focused on inflation and inflation expectations and will closely monitor this week’s data to assess whether rising input costs are feeding into the broader economy. If inflation surprises to the upside, it would increase the likelihood of further rate hikes, particularly following the more expansionary 2026–2027 federal budget.

For now, the market is pricing in a rate hike in August, although this will depend on economic conditions and developments related to the Middle East conflict.

At this week's meeting, the RBNZ is widely expected to keep rates unchanged at 2.25%. The Bank will continue to monitor how inflation pressures are affecting the broader economy.

While the Middle East conflict has added another layer of uncertainty, the central bank is likely to signal that discussions around removing monetary stimulus are becoming increasingly urgent. There is already growing support within the Monetary Policy Committee for an earlier start to policy tightening, potentially as soon as this meeting.

In the U.S., the consensus for the core PCE price index m/m is 0.3% vs. 0.3% prior. Personal income m/m is expected at 0.4%, compared to the previous 0.6%, while personal spending m/m is forecast at 0.5% vs. the prior 0.9%.

Consumer spending remained relatively resilient in April, with core retail sales showing solid momentum despite mounting economic headwinds. Data suggests that household demand carried into the second quarter on a firmer footing than expected, supported by steady goods spending and slight upward revisions to previous months.

However, the broader outlook is becoming more challenging. The Middle East conflict is contributing to renewed inflationary pressure and analysts from Wells Fargo project the PCE deflator rose by 0.4% in April. This suggests much of the increase in nominal spending is likely being offset by higher prices, leaving real consumption growth relatively modest.

Consumers are also facing a softer labor market backdrop, with slower hiring and easing wage growth beginning to weigh on purchasing power. Although personal income is expected to rise moderately, inflation-adjusted income growth remains weak, which could limit the momentum of consumer spending going forward.

In Japan, the consensus for the Tokyo core CPI y/y is 1.5% compared to 1.5% previously. Inflation is expected to remain subdued for now, and since the Tokyo CPI is a leading indicator for the national CPI, any surprise to the upside would add to expectations that the BoJ will remain on a tightening path.

Meanwhile, a weaker outcome would reinforce a more cautious stance but ultimately, the outlook still hinges on how strongly wage gains impact prices.

In Canada, the consensus for GDP m/m is 0.1%, compared to the prior 0.2%. The economy is expected to have returned to growth in Q1 2026, rebounding at around 1.7% annualized after the slight contraction in Q4.

The earlier decline appears less concerning on closer inspection, with domestic demand holding up as government, household, and business spending continued to improve, while inventories and housing were the main drags.

For Q1, home resales remained a weak spot, but were partly offset by firmer consumption and government spending, along with a likely reversal of some one-off Q4 disruptions from the education and transportation strikes.

Imports are set to surge, which would weigh on net exports, although this again reflects stronger underlying demand rather than economic weakness, according to RBC analysts.

Growth is unfolding against a backdrop of slower population growth, meaning per-capita activity is likely improving more meaningfully. This supports the broader view that living standards are gradually strengthening, provided oil prices stabilize and trade tensions with the U.S. do not intensify.

Looking at the monthly data, the 0.1% GDP increase is expected to be led by wholesale trade and a recovery in manufacturing output, especially for autos, while weakness in mining, energy, and retail likely capped overall gains.