Last week saw a significant shift in market dynamics, driven by encouraging inflation data from the US and continued political uncertainty. The week began with global bond yields edging lower as markets reacted to mixed economic signals and anticipated central bank actions.

The highlight of the week was the US CPI report, which showed inflation falling faster than expected. This bolstered hopes for an earlier-than-anticipated rate cut by the Federal Reserve. Consequently, US bond yields fell sharply, with two-year Treasury yields dropping by twelve basis points. The ten-year yields also saw a significant decline. This move was mirrored in the currency markets, where the US dollar weakened, prompting a notable rise in the Japanese yen.

Equity markets had a mixed response to these developments. The Dow Jones Industrial Average managed to stay in the green, buoyed by gains in industrial stocks. In contrast, tech-heavy indices like the Nasdaq and the S&P 500 experienced declines, with the Nasdaq falling nearly 2% by the end of the week. This divergence suggests a rotation away from tech stocks, which have led market gains in recent months, towards more cyclical sectors that could benefit from a softer landing for the economy.

Political events also played a significant role. In France, exit polls indicated that Marine Le Pen's party would not secure a majority, reducing fears of a sharp rightward shift in French politics. This led to a temporary relief rally in European markets, although the broader economic outlook remains cautious due to persistent inflation concerns and subdued growth prospects.

In the UK, economic data was somewhat encouraging, with GDP growth for May coming in better than expected at 0.4% month-on-month. This provided some respite for the Bank of England, which faces a delicate balancing act as it navigates high inflation and sluggish economic growth. However, political uncertainty continues to loom large with ongoing discussions around the UK's fiscal policies under the new Labour government.

In materials-rich and financial-heavy Canada the unemployment rate ticked up slightly, leading to increased speculation that the Bank of Canada might consider rate cuts sooner than previously anticipated. Closer to home, the Reserve Bank of New Zealand delivered a dovish policy statement, acknowledging economic weaknesses but stopping short of immediate rate cuts. Taken together, these developments paint a picture of expected rate cuts globally. By contrast, our Reserve Bank of Australia remains cautious, with mixed signals on consumption and inflation making future rate moves uncertain.

Looking ahead, the focus will be on key economic data releases and central bank testimonies. US PPI data, UK monthly GDP figures, and Japanese wage data will be closely watched for further clues on the global economic outlook. Additionally, Federal Reserve Chair Jerome Powell's testimony to Congress will be scrutinised for any hints about the Fed's policy trajectory. Overall, markets remain delicately balanced between the optimism of falling inflation and the uncertainty posed by political developments and mixed economic signals.