ORLANDO, Florida, May 16 (Reuters) -

- TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

If anyone wanted a snapshot of the tight spot the U.S. economy

and policymakers are in right now, they got it on Friday via the

University of Michigan's latest consumer sentiment and inflation

expectations survey.

The results were eye-popping: consumer sentiment

expectations are now the lowest since 1980 and one-year

inflation expectations are the highest since 1981, above 6%.

Sentiment surveys are only 'soft' data and there is much

debate whether they translate into the 'hard' activity data like

retail sales and hiring. Fed Chair Jerome Powell said earlier

this month the link between the two in recent years has been

"weak" and he has previously downplayed the U-Mich inflation

expectations figures.

But the direction of travel is getting harder to ignore.

Consumers are spooked by President Donald Trump's trade war and

fear tariffs will push up prices, forcing them to curtail

spending. If this soft data filters into the hard data, the

economy could be in the grip of 'stagflation' later this year.

This calls into question the sudden optimism that washed

across financial markets following the US-China trade truce.

It's hard to believe it's been less than a week since the

world's two largest economies agreed to reduce reciprocal

tariffs and put them on pause for 90 days.

The speed with which economists raised their growth

forecasts on the detente, and the scale of the rally across

financial markets, was pretty remarkable considering the damage

from tariffs has yet to be felt and the amount of uncertainty

that is still hanging.

But markets brushed all that aside and ended a remarkable

week on a strong footing. The S&P 500 and Nasdaq rallied 5% and

7%, respectively, to their highest in two months, and the Nasdaq

is up 30% since April 7. The Dow's rebound means it has recouped

its 'Liberation Day' losses and is now flat for the year.

Other markets have moved a lot too. Germany's DAX hit a

record high and is also up 30% from the April low, the MSCI

World index has risen in 17 of the last 19 sessions, and

safe-haven gold fell 4%, its steepest weekly loss this year.

The U.S. and European earnings season is drawing to a close,

and although some big firms pulled guidance or issued profit

warnings due to the tariff uncertainty, results and the outlook

were broadly positive.

Renewed growth optimism, therefore, would appear to be

partly behind the rebound in bond yields. Fed rate cut

expectations and projections for further Chinese stimulus have

been pared back, pushing up bond yields in both countries and

beyond.

But U.S. fiscal worries are also brewing, and on Friday

Republicans rejected President Donald Trump's tax package

because it didn't go far enough on spending cuts. Watch this

space.

Underscoring how difficult it is to make economic forecasts

in these highly uncertain times, this week threw up some big

data surprises - unexpectedly strong UK GDP growth in the first

quarter, weaker-than-expected GDP in Japan, and the steepest

fall in U.S. producer prices since 2009.

You wouldn't bet against similar surprises next week.

I'd love to hear from you, so please reach out to me with

comments at . You can also follow me at @ReutersJamie and

@reutersjamie.bsky.social.

This Week's Key Market Moves

* The Nasdaq rises 7%, one of its best weeks in recent

years.

* Big tech surges - the Roundhill 'Mag 7' ETF rallies almost

10%.

* Gold falls 4%, its worst week since November.

* Dollar index rises 0.8%, its fourth consecutive gain and

best

week since February.

Chart of the Week

I wrote earlier this week on why the 'Global South' may

stand to benefit if the era of 'U.S. exceptionalism' and the

world economic order of the last several decades are drawing to

an end.

The Global South (ex-China) carries all the investment risks

associated with emerging markets, but boasts attractive

demographics, strong growth rates, and is rich in natural

resources. It punches well below its weight in financial market

terms, so should investors be increasing their exposure?

One chart that surfaced this week suggests that ball is

already rolling, at least in equities. What's more, the momentum

behind it looks pretty strong too. Is a paradigm shift underway?

Here are some of the best things I read this week:

1. World Economy Now. May 2025. Putting Trump's

trade

tantrum in its place - Adam Tooze

2. American Exceptionalism Meets Its Maker - Barry

Eichengreen

3. Tracking Federal Expenditures In Real Time

4. Trump's Tariffs Are Not About Dolls

5. US aid cuts leave food for millions mouldering in

storage

What could move markets on Monday?

* China fixed asset investment, industrial production,

retail

sales, house prices, FDI (April)

* Several Fed officials speak at various events, including:

Chicago Fed President Austan Goolsbee, New York Fed President

John Williams, Atlanta Fed President Raphael Bostic, and Dallas

Fed President Lorie Logan

Opinions expressed are those of the author. They do not

reflect the views of Reuters News, which, under the Trust

Principles, is committed to integrity, independence, and freedom

from bias.

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(Writing by Jamie McGeever; Editing by)