An Inflationary Cocktail: Tariffs and oil make traders re-price inflation expectations – Lunaro Weekly Report

Nick Spencer-Skeen, Senior Executive Officer, Lunaro Markets Limited

Friday Closing Prices

• S&P 5007,412 (+0.05%)
• Nasdaq24,976 (-0.64%)
• Gold $4,053 (+0.08%)
• Brent Crude Oil$98.38 (-2.29%)

 Geopolitics was again the main driver for traders last week, not just from the escalating US-Iran conflict, but also from renewed tariff threats. When we add in a mixed start to Big Tech earnings, the key takeaway was that market participants renewed their focus on inflation risks and how monetary policy may evolve in response to changing economic conditions.

Oil remained the dominant macro driver. Brent pushed towards $100 per barrel, rising more than 20% in two weeks as attacks around the Strait of Hormuz and Bab al-Mandeb threatened key Middle Eastern export routes. The renewed energy shock pressured global bonds, with US long-end yields rising and German Bund yields reaching their highest since 2011.

Equities were more mixed. Both the S&P 500 and the Nasdaq 100 finished the week in the red after Alphabet’s strong cloud results were overshadowed by another increase in expected AI capital expenditure. European equities proved more resilient, helped by energy and financials, while emerging markets weakened sharply into Friday.

In FX, the US dollar recorded its strongest week in a month as geopolitical and tariff risks supported haven demand. A notable loser was the Japanese yen, as fresh selling pressure push USD/JPY to a fresh multi-decade high to close the week at 163.83.

Commodities remained firm beyond oil, with silver extending a strong two-week rally and Bloomberg noting gold attracted $2bn of weekly fund inflows.

The fragile geopolitical framework extends into the new week, while traders also will negotiate the US Federal Reserve meeting on Wednesday.

Fed Meeting Set to Guide Markets

Markets overwhelmingly expect the Fed to keep interest rates unchanged at the meeting this week. Therefore, the more important question is whether Chair Warsh uses the meeting to prepare markets for a potential hike later this year.

Since the previous meeting, market participants have become increasingly attentive to inflation risks.  Oil prices have moved higher, tariff risks have resurfaced and inflation continues to be monitored closely by policymakers. At the same time, economic activity remains solid and the labour market has shown little evidence of the deterioration that would prevent the Fed from tightening if required.

The key thing to watch will therefore be how Warsh wants to frame this information. He has deliberately avoided providing strong forward guidance, but that becomes harder as inflation risks build and several FOMC members push a more hawkish message.

Traders will be watching for any change to the statement’s inflation language, whether Warsh characterises higher oil prices as temporary or persistent, and how strongly he pushes back against expectations for a 2026 hike.

US interest rate futures currently imply a 71.3% chance of a September hike, with 44bps worth of hikes priced through to the end of the year.

Big Tech, Bigger Expectations

It’s another heavy week for Big Tech earnings, with Microsoft, Meta, Apple and Amazon reporting across Wednesday and Thursday. Collectively, these results are expected by many market participants to provide an important indication of investor sentiment towards ongoing AI-related investment

Last week’s Alphabet report established a difficult benchmark. Revenue rose 24% and Google Cloud growth accelerated to 82%, yet shares fell after management raised 2026 capex guidance to $195–205bn.

That makes capex guidance the critical metric this week. For Microsoft and Amazon, attention will centre on Azure and AWS growth relative to infrastructure spending. Meta will be judged on whether AI investment is improving advertising monetisation, while Apple faces questions around product demand and its broader AI strategy.

As we saw last week, the implications from these mega-cap earnings extends well beyond the four stocks. Further capex increases could support semiconductors and data-centre related companies, but pressure hyperscaler free cash flow and valuations. Conversely, any spending slowdown risks being interpreted as evidence that the AI infrastructure cycle is beginning to cool. Ultimately, it’s a difficult tight rope to walk across.

Dollar Momentum Builds

As shown in our Chart of the Week, the US dollar enters the week close to 52-week highs, and trending higher. It has attracted increased market attention as geopolitical developments have contr  .

“Increased market expectations for the possibility of additional policy tightening have also supported demand for the US dollar.”

Relative weakness elsewhere has amplified the move. Not only has the yen has fallen but the Euro has softened following the European Central Bank (ECB) decision to leave rates unchanged. Renewed US tariff threats have provided another source of dollar haven demand.

If inflation concerns and higher interest rate expectations persist, some market participants believe the US dollar could continue to receive support. However, future market movements remain dependent on evolving economic data, central bank policy and geopolitical developments.”

Market expectations remain subject to change. Any easing in geopolitical tensions, softer-than-expected inflation data or weaker economic activity could alter expectations for monetary policy and broader financial markets.”

Economic Calendar 

 Chart of the Week

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