Last week, the narrative flipped. Hot inflation data and surging Fed hike odds killed the soft landing story. The dollar rallied. Gold sold off. And the US economy became the center of attention again.
This week, the US economy faces its first hawkish test. Can the consumer stay resilient? Is the AI trade justified at these valuations? And just how close is the FOMC to endorsing the market’s repricing?
The answers will come from three pillars: FOMC minutes, flash PMIs, and a global data dump from China, the UK, Japan, and the Eurozone.
Let us dive in.
Recap: What Happened Last Week (May 11–15)
Before we look forward, here is how last week set the stage. The US economy delivered hotter-than-expected data across the board.
| Event | Actual | Market Impact |
|---|---|---|
| CPI (April) | 3.8% YoY (vs 3.3% prior) | Killed rate cut hopes |
| PPI (April) | 6.0% YoY (highest since 2022) | Producer inflation surging on energy |
| Retail Sales | +0.5% | Consumer resilience = Fed no need to cut |
| Fed Hike Odds | Surged from <20% to ~40-65% | Markets now pricing a 2026 hike |
| Gold (XAU/USD) | -1-2%, broke below $4,630 | Technical breakdown |
| Dollar (DXY) | +1.2%, best week since March | Dollar rally confirmed |
| S&P 500 | New ATH above 7,500 | AI/tech narrow leadership |
The bottom line: The soft landing narrative died. The higher-for-longer narrative is back. Markets are now pricing a potential Fed hike before any cut. And the US economy is the reason why.
As we covered in [our Friday Wrap] the dollar won, gold lost, and the US showed resilience that forced a complete policy repricing.
The Core Macro Narrative: A Market at an Inflection Point
The US economy is not booming. But it is outperforming.
Last week’s CPI (3.8% vs 3.3% prior) and PPI (6.0% year-over-year, the hottest since 2022) forced a complete repricing of the Fed’s policy path. Markets no longer debate when cuts will come. According to the [CME FedWatch tool] traders now assign a 64% probability of a rate hike by December 2026, with a full 25bps hike priced by March 2027.
This is a 180-degree turn from just six weeks ago, when two cuts were the consensus. The US economy is simply too strong for the Fed to cut, and the energy crisis is keeping inflation sticky.
For a deeper look at [trading around major news events] our guide covers how to position before data releases like CPI and NFP.
Pillar 1: FOMC Minutes (Wednesday)
On Wednesday, the Fed will release the minutes from its April 28-29 meeting – the final meeting of the Jerome Powell era.
The Context
At that meeting, the Fed held rates steady (3.50-3.75%), but the vote was the most divided since 1992 (8-4). Three dissenting officials opposed retaining the “dovish” wording in the statement. This internal rebellion occurred before the hot April CPI and PPI prints came in.
The US economy was already showing signs of resilience at that meeting. Since then, inflation has accelerated. The minutes will reveal just how concerned the committee really is.
What Markets Will Scrutinize
The Inflation Discussion: According to [HSBC economists] the minutes will show “considerable discussion about the outlook and risks related to inflation and inflation expectations.” The key question: does the committee believe the energy-driven inflation spike is transitory or structural?
The Hawkish Bloc: Analysts will parse the text for clues on just how close the committee is to shifting to a tightening bias. If a broader cohort of members expressed concern about energy-price pass-through, it would solidify the market’s current pricing for a year-end hike.
The Macro Takeaway
The Fed is trapped. Strong consumption data gives them no reason to cut, while sticky inflation forces them to hold. The minutes will likely confirm that the “higher for longer” narrative is now the base case inside the Eccles Building.
For more on [understanding central bank communication] our guide explains how to read Fed minutes and predict market reactions.
Pillar 2: Flash PMIs (Thursday)
The S&P Global Flash US PMI, along with releases from the Eurozone, Germany, France, and the UK, will provide the first real-time snapshot of May economic activity.
United States
Manufacturing is expected to soften slightly, but services remain resilient. The US economy has been supported by consumer spending, but high gasoline prices ($4.50+ per gallon) are a growing headwind. The PMI will show if that is crushing new orders.
Eurozone
Oxford Economics lead economist Daniel Kral expects the composite PMI to remain in “mild contractionary territory (below 50).” Higher energy costs are hitting European consumers’ spending power much harder than in the US, widening the growth divergence that supports the Dollar.
Unlike the US economy, the Eurozone is struggling with energy dependency and weaker fiscal buffers. That divergence is not closing this week.
United Kingdom
The UK releases inflation, unemployment, and retail sales data this week. The pound dropped 1.9% last week on political uncertainty. The US economy is outperforming the UK, where stagflation risks are rising.
China
China releases industrial output, retail sales, unemployment, housing prices, and fixed investment. The US economy is slowing, but China’s deflation risks are worse. A slowdown here would hit commodity currencies (AUD, CAD) and cap oil sentiment.
Japan
Japan’s first-quarter GDP is due. The yen is struggling at 158 per dollar. Unlike the US economy, Japan faces demographic headwinds and a weakening currency. Weak GDP would put more pressure on the BoJ to act.
For a full breakdown of [global economic indicators explained] our guide covers how to interpret PMIs, GDP, and inflation data from major economies.
The Global Divergence: Why the US Economy Wins
The US economy is not perfect. But it is outperforming every other major region.
| Region | Problem | Impact on Dollar |
|---|---|---|
| Eurozone | Energy costs crushing spending power, PMIs in contraction | Weak EUR = strong DXY |
| United Kingdom | Political uncertainty, stagflation vulnerability | Weak GBP = strong DXY |
| China | Property crisis, weak consumption, deflation risks | Weak CNY = strong DXY |
| Japan | BoJ intervention threat at 160, weak GDP expected | Capped JPY = strong DXY |
As Francesco Pesole FX strategist at ING, said last week:
“The dollar is catching up with the strong data. It feels like there is a realisation that the US story in an energy crisis may just end up being much better than many other places in the world.”
The US economy is not booming. But it is the cleanest shirt in a dirty laundry basket. That is why capital flows into the dollar.
The Big Question: How Much Is Priced In?
The market has moved from pricing two cuts to pricing one hike in just six weeks. That is a massive repricing.
The question for this week is whether the pendulum has swung too far.
- If FOMC minutes sound less hawkish than the market expects: The dollar could give back some of its gains. Gold could bounce. The US economy might not be as strong as the market thinks.
- If PMIs show the consumer is cracking: Rate hike odds will fall. The dollar will soften. Gold will rally.
- If the data stays strong and the Fed sounds hawkish: The dollar rallies further. Gold tests $4,560. The US economy remains resilient.
But here is the contrarian take. The market is now pricing a 64% chance of a hike. That leaves room for disappointment. If the Fed minutes reveal internal disagreement or if any data point softens, the hawkish narrative could fade fast.
This is a market that pays to fade extremes. Last week, the asymmetric opportunity was to buy the Dollar. Now? If we get another push higher in DXY, the asymmetric opportunity shifts to the opposite side.
What to Watch This Week
| Day | Event | Impact |
|---|---|---|
| Tuesday | Japan GDP, Eurozone PMIs, US housing data | Growth divergence signals |
| Wednesday | FOMC minutes (April meeting), UK inflation | Hawkish or dovish tilt? |
| Thursday | Flash PMIs (US, Eurozone, UK, Germany, France), US jobless claims | First look at May activity |
| Friday | Japan CPI, UK retail sales | BoJ policy cues, UK consumer health |
The Bottom Line
The US economy is the main character this week. FOMC minutes will reveal how close the Fed is to endorsing a hike. Flash PMIs will show if the consumer is cracking. And global data from China, the UK, Europe, and Japan will confirm the divergence that keeps the dollar bid.
Position into the data, not the narrative. Do not chase the first reaction. And be ready to fade the extremes if the hawkish pricing goes too far.
Watch oil. Watch the Fed. Watch the US economy. Everything else is noise.
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