After jobs report shock, US CPI data to test AI rally; here's how to trade around it

US stocks regained some footing on Monday after a bruising selloff at the end of last week, with technology and semiconductor shares leading a rebound as investors looked past short-term volatility and continued enthusiasm around artificial intelligence.

The recovery comes at a critical moment for markets, however, with investors now turning their attention to upcoming inflation figures that could determine whether the rally in risk assets can continue or faces renewed pressure from rising interest-rate expectations.

The Nasdaq Composite ended Monday nearly 0.9% higher, while the S&P 500 added 0.3%.

Technology stocks led gains across sectors, with the S&P 500 technology index rising 1.5%.

Chipmakers, which bore the brunt of Friday’s selloff, staged an especially strong recovery.

The Philadelphia Semiconductor Index climbed 5.6%, recouping part of the losses suffered after a sharp correction that erased roughly $1 trillion in market value from US-listed semiconductor companies.

Strong jobs report shifted Fed expectations

Non-farm payrolls increased by 172,000 in May, far exceeding forecasts for a gain of 93,000 jobs.

The unemployment rate remained unchanged at 4.3%.

Adding to the positive surprise, payroll figures for March and April were revised higher by a combined 93,000 jobs, producing the strongest three-month employment gain in more than two years.

While robust labour market data is typically supportive for economic growth, investors interpreted the report as reducing the likelihood of Federal Reserve rate cuts in the near term.

Interest-rate markets quickly adjusted their expectations, with traders now pricing in approximately 27 basis points of tightening by December 2026, reflecting growing belief that policymakers may need to keep monetary conditions restrictive for longer.

CPI report becomes the next major catalyst

Attention has now shifted squarely to the May Consumer Price Index report due on June 10.

According to Charu Chanana, Chief Investment Strategist at Saxo, the inflation report has taken on outsized significance following the payrolls surprise.

"That makes this CPI report more than just another macro data point. It is a live trading event across equity indices, bond futures, FX and commodities," Chanana said.

Rising energy prices, particularly gasoline costs linked to geopolitical tensions in the Middle East, alongside persistent shelter inflation and firmer goods prices, have contributed to concerns that inflation may prove more stubborn than policymakers would like.

Market expectations already point to a modest acceleration in inflation pressures.

Economists expect headline CPI to rise 0.5% month-on-month in May, while core CPI, which excludes food and energy prices, is forecast to increase 0.3%.

On an annual basis, headline inflation is expected to accelerate to 4.2% from 3.8% in April, while core inflation is projected to edge up to 2.9% from 2.8%.

Three possible market scenarios

The most challenging outcome for markets would be inflation data that exceeds expectations, particularly if core CPI rises above the anticipated 0.3% monthly pace.

"This would suggest that inflation remains sticky despite the Fed’s restrictive policy stance. Combined with Friday’s strong labour market data, it would reinforce the idea that the Fed has little reason to ease and may need to keep policy tight for longer," she said.

Such a scenario could push Treasury yields higher, strengthen the US dollar and trigger renewed weakness in equities, particularly among growth and AI-related stocks whose valuations are sensitive to interest rates.

If inflation arrives largely in line with expectations, markets could find themselves in what Chanana describes as an uncomfortable middle ground as inflation would still be above target, the labour market would still look resilient, leaving the Fed with limited room to adopt a more dovish stance.

Source: Saxo

Equities could stabilise, but any rebound may struggle to gain momentum as investors debate whether policy will remain restrictive for an extended period.

The most supportive outcome for risk assets would be a softer-than-expected core inflation reading, especially if core inflation comes in below 0.3% month-on-month.

A lower core CPI figure would challenge the notion that strong employment data alone justifies a more hawkish Fed outlook and could encourage investors to scale back expectations for further tightening.

It could prompt investors to dial back recent bets on a more hawkish Federal Reserve, potentially triggering a relief rally across risk assets.

Such an outcome would likely support technology shares, weaken the dollar and boost demand for assets such as gold.

Tips for traders to position for the CPI data

Despite the market's rebound, strategists caution that volatility around the inflation release could remain elevated.

Chanana noted that traders should avoid viewing the CPI report as a straightforward directional bet, as initial market reactions can often reverse once investors digest the underlying details.

"The first rule is to avoid treating CPI as a one-way bet. The data can trigger sharp moves, but the first move is not always the final move," she said.

According to her, for investors positioning for a stronger-than-expected inflation reading, strategies may include reducing exposure to growth-oriented equities, taking long positions in the US dollar and adopting bearish bets on short-dated Treasury futures.

However, any unexpectedly soft components within the inflation report could quickly reverse those trades.

Conversely, investors expecting a softer CPI outcome may favour exposure to Nasdaq-linked assets, gold and short US dollar positions.

The risk in that scenario is that any relief rally could prove short-lived if markets conclude that a single benign inflation reading is insufficient to materially alter the Federal Reserve's policy outlook.

For those reluctant to take a directional view ahead of the data, waiting for market reactions to settle may be the more prudent approach.

The first half hour following the release is often marked by sharp swings and elevated volatility.

A clearer indication of market sentiment may emerge from whether equities sustain their initial move, whether the dollar confirms the direction and whether Treasury futures reinforce or challenge the market's recent repricing of Federal Reserve expectations.

How equities, Treasury yields and the US dollar behave after the initial reaction could ultimately provide the strongest indication of whether the market's AI-fuelled rally still has room to run.