A Reuters Open Interest newsletter

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

The S&P 500 and Nasdaq fell on Tuesday, dragged down by a sharp decline in semiconductors, while sentiment was also rattled by rebounding oil prices and stronger-than-expected U.S. inflation which both lifted bond yields.

In my column today, I look at the case for U.S. rate cuts this year. Rates traders have removed all easing bets and most economists have too, but some are still holding out. Here's their argument. 

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

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* 4, and core?

Headline annual U.S. CPI inflation rose to 3.8% in April, higher than expected and the highest in three years. This means real wage growth has turned negative for the first time since 2023 also. It looks like 4% - double the Fed's target - will be hit soon, perhaps next month.

This is bad news for President Trump, whose approval ratings are already low. For Fed officials, the key issue is whether this spills into core inflation. CIBC economists say this has begun, Morgan Stanley says pass through remains limited.

* Keir pressure

If the U.S.-Iran ceasefire is on 'life support', so too is UK leader Keir Starmer's prime ministership. After the ruling Labour Party suffering bruising defeats in local and devolved national elections last week, Starmer is defying calls to quit. But the calls, from within his own party, are getting louder.

Wary that any successor may increase borrowing and spending, long-term UK bond yields have surged to the highest since 1998, and sterling is the biggest decliner among major currencies on Tuesday. The pressure, political and market, is building. 

* When the chips are down

Chip stocks slumped on Tuesday, with the Philadelphia Semiconductor index down as much as 6% before halving those losses by the close of play. What triggered it? Maybe pure froth - it was up 70% in six weeks - and South Korea's KOSPI's wild rollercoaster ride on Tuesday.

Meanwhile, AI giant Anthropic updated rules surrounding the buying and transfer of its shares, raising some doubt around ownership rights once the firm goes public. "Any sale or transfer of Anthropic stock, or any interest in Anthropic stock, that has not been approved by our Board of Directors is void and will not be recognized on our books and records." 

The U.S. interest rate outlook has turned decidedly hawkish since the Iran war started, completely wiping out market expectations for Federal Reserve cuts this year. But not everyone has thrown in the towel. 

Before the conflict began on February 28, rates futures markets were pricing in around 50 basis points of easing by year end, partly because President Donald Trump's nominee for Fed Chair, Kevin Warsh, was expected to be more committed to lowering borrowing costs. 

But the historic energy shock set off by the war has upended the rates picture. Headline annual inflation is inching near 4% - double the Fed's target - and the Fed is now expected to remain on hold all year. If it does move, it will be to tighten, current pricing shows.

Many economists have removed their 2026 rate cut calls or pushed them back to next year. But economists at Citi and MUFG are among the few who still think the Fed will be forced to act forcefully this year. Why? Because they believe the economy and labor market are weaker than they appear.