Week ahead: another fork in the tape—chase the break or wait for the whip?

Next week’s CPI release is the market’s next pressure point.

The S&P’s Levitation Act: CPI, Tariffs, and the Trapdoor Below

Wall Street is drifting just shy of all-time highs, but don’t let the calm surface fool you—this market is more like a high-wire act than a victory parade. The S&P 500 may have Houdini’d its way back above 6,000, but that’s not a green light to switch off your radar. When tail risk is priced and predictable, it rarely bites. It's the unexpected headlines—the flash tariffs, the policy rifts, the CPI gut punches—that can knock the wind out of even the most bulletproof trend.

Next week’s CPI release is the market’s next pressure point. If the inflation dragon rears its ugly head again, it’s not just going to breathe fire at the Fed—it’s going to start scorching consumer wallets. Higher prices don’t bite immediately, but they leave marks. And if the CPI print shows any signs of re-acceleration, it’s game on for a more resounding demand crunch. Discretionary spending is already walking a tightrope; another flare-up in inflation tips it into a nosedive. What appears to be resilience today could easily morph into recession-lite tomorrow, especially if households start pulling back just as growth is already losing altitude.

The real risk? Not just another CPI surprise—but the slow burn that follows. Inflation hits hardest not at the index level, but where it matters: essential bills and the quiet erosion of purchasing power. If that dynamic kicks back amid the omnipresent tangled political theatre in Washington, we could be gliding into a consumer-led stall.

But here’s the rub—policy landmines are scattered all over the road ahead. Trump’s tariff détente since “Liberation Day” has brought some relief, but the July 8 cliff for his 90-day pause is rapidly approaching. Meanwhile, fiscal chaos in D.C. is injecting fresh noise. The tax-cut and spending bill has become a political grenade, with Elon Musk yanking the pin and Trump fuming at the fallout. When the White House and Wall Street’s poster child for innovation go to war, it’s not just tabloid fodder—it’s a flashing red light for risk.

Add to that Monday’s trade pow-wow in London, where Trump’s three-headed economic hydra—Bessent, Lutnick, and Greer—will face off with China. That’s not a negotiating team; that’s a volatility machine with competing scripts and no agreed finale. Markets may smile politely at the meeting’s photo op, but if the messaging fractures, expect a sudden reversal.

Beneath it all, the S&P is levitating on a cushion of hope—hope that growth holds up, inflation cools, and policymakers don’t shoot themselves in the foot. But the higher we float, the thinner the air gets. This isn’t a bull market built on earnings acceleration or credit easing—it’s a balancing act atop a rickety scaffolding of fiscal promises, trade optics, and macro wish-casting.

Stay nimble, stay cynical, and remember: the real market killers aren’t lurking in the data calendar—they’re hiding in plain sight, waiting for a headline to unlock the trapdoor.

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Bonds Buckle, AI Roars: Is The Next Capital Recode Underway ?

“Trump sets a summit with Xi”... scratch that — “Trump and Musk torch their bromance on live TV.” Another week, another headline rupture Markets barely get a chance to digest one narrative before the next one hijacks the tape.

After clocking the strongest May in over three decades—Nasdaq +9%, S&P +6%—we’re now marooned in macro no man’s land. The market has priced in détente: tariffs tamed, trade war de-escalated, recession risks dialed down. The left-tail scenarios that haunted Q1? Softened, at least optically.

But that tranquility feels rented, not owned. Lurking underneath is a different story—one built on ballooning fiscal deficits, persistent dollar fragility, foreign capital rotation away from U.S. exposure, and a 30-year Treasury yield that’s dancing on the edge of a confidence cliff. Add in headline risk from the Trump volatility engine, and you've got a market levitating on narrative fumes.

The rally’s been real. But so are the cracks beneath it

Global equities have been quietly grinding higher under the radar, with four straight weeks of net buying. Europe’s been the surprise locomotive—last week saw the largest notional long inflows in three months. But FX is becoming the silent boost juice for EU stocks . The S&P vs DAX gap may look like ~20% on paper, but FX-adjusted, the spread’s closer to 30%. For the first time in years, long Euro exposure isn’t a drag—it’s a tailwind.

Performance books are slowly healing. Flows have flipped from "staying out" to "stopping in"—tentative buying followed by digestion. Systematic strategies are crushing fundamentals year-to-date, retail continues to step in as the marginal bid, and corporate buybacks haven’t blinked despite macro fog.

Thematic rotation is alive and well: defense stocks are up triple digits YTD, AI capex is clawing back from the April lows, and classic factors like momentum, size, and quality are reasserting themselves—while others start to wobble. The market, yet again, has scaled the wall of worry out of the trough of despair.

But the tail risks haven’t been exorcised—they’ve just been deferred. Putin’s next move? Section 899 tax retaliation? The next escalation in Trump’s tariff game of thrones? The S&P looks pinned beneath a short-term ceiling at 6000. There’s anxiety everywhere, but no clean catalyst—yet—for real de-grossing outside of a Trump-induced headline storm.

Cue the latest twist in that saga: Musk claims Trump wouldn’t have won without him… Trump fires back, says he asked Musk to leave and calls him “crazy”… Musk responds by accusing Trump of lying… and the cherry on top? Trump threatens to pull Tesla’s government subsidies and contracts.

The bromance is dead—and markets noticed. The S&P wobbled, Tesla cratered nearly 18% intraday. It was a sudden reminder that the vol reset may have been too smooth, too fast. The news cycle’s still weaponized, and positioning remains vulnerable to any fresh fracture in the political narrative.

Bond traders are back in the hurt locker. The U.S. 30-year is flirting with 5%—a level that rattles the walls of valuation models—and it’s not just about rates. Moody’s dropped a credit warning, long-end auctions are flopping (worst bid-to-cover since 2012), and there’s a growing sense that foreign appetite for U.S. duration is quietly vanishing. Treasury is being forced to lean on shorter issuance to keep the front-end digestible, but the back-end's starting to buckle under its own weight.

Overlay that with fiscal policy moving back into the fast lane. The Budget Reconciliation bill is set to extend the 2017 tax cuts, with a kicker: Capex and R&D expensing—likely an EPS tailwind for the S&P. But what’s spooking international desks is Section 899. Retaliatory tax measures aimed squarely at non-U.S. investors from countries running "unfair" tax regimes—EU, UK, Canada, Switzerland, Australia… the list isn’t short. If this weaponized tax clause goes live, it hits everything: business income, capital flows, dividend repatriation, even inbound M&A. And it would only reinforce the slow but clear trend: a cautious rotation away from U.S. exposure.

Meanwhile, stress continues to do what it does best—force adaptation. Gone are the unicorn days of 2020–21, where money chased the absurd—NFTs, 15-minute grocery startups, and "creator economy" gimmicks. The capital tide has turned. Now, venture flows are targeting real-world problems: energy grids, semiconductors, defense supply chains, and national resilience. The war-forgotten sectors are getting a second wind—and the public markets are picking up the scent.

AI, of course, is back at the center of the universe. It’s no longer just fantasy story-driven—now it’s capex-fueled and infrastructure-backed. Nvidia’s strong print kicked off a domino effect, with chipmakers and cloud providers vertically integrating power like it’s 1999—but smarter. Mary Meeker’s latest deck might be breathless, but she’s not wrong: the AI market is tracking toward a trillion-dollar run rate. And this time, it’s not just hype—it’s hardware, heat, and hard capital.

In short, we’re entering a new market regime: long bonds under siege, geopolitics weaponizing capital flows, and capital itself being re-allocated from gimmicks to grit. The rally may still be climbing the wall of worry—but the underlying playbook is being rewritten in real time.

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Jobs Beat, Yen Retreat—But Don’t Sleep on the Turn

The U.S. dollar is finished the week on firmer ground after a modest beat in the jobs report—enough to keep recession fears at bay but still broadly consistent with a cooling labor market. Under the surface, the data continues to deteriorate: downward revisions to prior months were eye-catching, especially in transportation and warehousing—a sector that’s increasingly reflecting early-stage tariff fallout.

In FX, the yen underperformed last week, but not for lack of reasons to turn. Super-long JGB yields finally found some footing as the BoJ and MoF quietly work to smooth out the supply overhang, which had been threatening to spill into broader bond market volatility. If those JGB conditions continue to improve and global risk sentiment holds up—particularly as U.S.-China trade tension cools—we think the BoJ is increasingly likely to lean hawkish. Inflation in Japan is still sticky, and the optics of a weaker yen won’t sit well with Washington as bilateral trade negotiations pick up steam.

That brings us to USDJPY. With spot hovering in the 145–146 range, we’re entering the sell zone again. The BoJ has every reason to resist further yen depreciation—not just due to inflation optics, but also because of yield curve stability. There’s also the not-so-subtle pressure from the U.S. Treasury, which yesterday called on Japan to run a tighter monetary policy to support the yen. Scott Bessent has been vocal about BoJ’s role in suppressing the yen’s fair value. That’s not driving policy change alone, but when paired with rising domestic inflation and political pressure, it moves the needle.

Time zone-wise, the FX flow is happening in London now—bigger moves, cleaner liquidity, more conviction. That’s where the real price discovery is.

As for the "Japan debt crisis" chatter—investors aren’t panicking because Japan holds a massive external buffer. The country sits on nearly ¥700 trillion in foreign assets, including ¥356 trillion in fixed income. The GPIF alone holds around 18.5% of that, and their newly reaffirmed 25/25/25/25 asset mix gives them flexibility. With a ±6% band on domestic bonds and ±5% on foreign bonds, any rise in super-long JGB yields could easily incentivize some reallocation back home—especially as the risk-reward shifts.

There’s also chatter building out of Tokyo. LDP lawmakers have proposed ramping up GPIF’s allocation to alternatives (currently capped at 5%, with only 1.65% deployed), suggesting flows into domestic VC and private funds should be prioritized. Add that to a higher-yield JGB backdrop, and domestic bid strength could increase from both institutional and retail flows—especially if risk appetite remains stable globally.

Ultimately, if market conditions remain calm and the inflation narrative continues to evolve, we see the BoJ incrementally shifting toward a more hawkish posture. They can’t afford to let the yen slip much further without risking another bout of JGB instability—or worse, renewed currency manipulation allegations from the U.S. Treasury.

I view post-NFP USDJPY levels as close to exhaustion. Unless U.S. data surprises to the upside in a big way or the BoJ backpedals again, the path of least resistance looks lower—toward 140, and possibly through it.