Global markets enter Tuesday's session in a defensive mood. A stronger-than-expected US jobs report on Friday, weekend escalation in the Middle East, and a sharp pullback in the chip sector have combined to reshape rate expectations heading into Wednesday's May Consumer Price Index release.
The CME FedWatch Tool now shows roughly a 70% probability of a Federal Reserve rate hike in December, up from around 45% a week ago and just 14% a month ago. The shift reflects three developments.
First, Friday's US Nonfarm Payrolls report came in firmer than markets expected, reinforcing the view that the labour market remains resilient under new Fed Chair Kevin Warsh. The US dollar surged and Treasury yields rallied in the immediate aftermath.
Second, weekend missile exchanges between Israel and Iran marked the most serious escalation since April's ceasefire. While both sides today reportedly agreed to halt attacks and President Trump said negotiations are advancing, the energy supply risk premium has returned to oil markets.
Third, several major banks have moved their forecasts in a hawkish direction. Goldman Sachs no longer expects a Fed rate cut in 2026, pushing the first cut to June 2027. BNP Paribas now expects rate hikes to begin in December.
Gold has been the clearest casualty of the shift. The metal traded around $4,300 an ounce on Tuesday, its lowest level since March and effectively erasing year-to-date gains. Higher real yields and a firmer dollar continue to weigh on the non-yielding asset.
Equities have been volatile. Friday delivered "Wall Street's worst day of the year," driven by a 10% plunge in the chip sector. Micron fell 13.25% and SanDisk dropped 11.39% — both their biggest single-day declines since the US-China trade war.
Monday brought partial relief, with chips rebounding. Intel surged more than 10% after Google reportedly placed orders for millions of AI chips, helping stabilise broader sentiment.
Markets expect May headline CPI to accelerate to 4.2% year-on-year, up from 3.8% in April. That would mark the highest reading in over two years and would arrive at the worst possible moment for a Fed already under pressure to consider rate hikes.
If the print lands above expectations, it could trigger another leg higher in the dollar and Treasury yields, additional pressure on gold, and renewed selling in rate-sensitive equity sectors. A softer print would offer the first real relief to risk assets in several sessions.
The macro setup heading into May CPI is unusually tense. Strong jobs, hawkish bank forecasts, and renewed geopolitical risk have already pushed markets to price in another rate hike before year-end. Wednesday's print will determine whether that repricing continues — or whether markets get their first taste of relief in weeks. Volatility is likely to stay elevated across indices, gold, oil and the dollar.
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