This week in the markets: inflation dominates in a quiet week for results and economic data; meanwhile attention shifts from strong earnings growth to valuations in an environment of rising bond yields.

With public holidays the world over this week, it’s going to be a quiet few days on the data and results front. But a handful of inflation prints in key markets will give investors plenty of food for thought on one of the key market questions today - how robust can the current remarkable equity bull market remain if bond yields keep pushing higher?

In the US, it will be all eyes on the Fed’s preferred measure of inflation - the personal consumption expenditures index. Economists are forecasting a 3.4% year-on-year rise, which will be the biggest jump since the middle of 2023.

That will be a tricky welcome-aboard present for new Fed chair Kevin Warsh, who was nominated by President Trump on the back of his stated preference for lower interest rates but may find it difficult to deliver them if inflation remains punchy.

If inflation pressures are broad-based, it becomes harder for the Fed to dismiss them as simply ‘transitory’. If they push inflation expectations higher, too, it becomes difficult to resist higher interest rates in response.

Markets have put to one side expectations earlier in the year that there would be two or three interest rate cuts this year in America and replaced that optimistic view with ‘no change’ or even a hike in rates from here.

Although, inflation is less of a concern in Japan, where rising prices have been seen as a welcome relief from years of deflation, a 1.9% rise in core CPI, excluding energy and fresh food, suggests that price rises are not just a reflection of Japan’s dependence on imported oil. Further inflationary pressures point to higher rates in Japan too.

Finally, European inflation data at the end of the week will give an indication of whether fuel price hikes in the single market are stoking stagflation fears against a backdrop of economic stagnation in the region’s German engine room.

The ECB is widely expected to raise interest rates by a quarter point to 2.25% at its next meeting on June 11. That would be the first hike since September 2023. There’s an 84% chance of that now priced into futures markets and a second hike is expected by the end of the year.

So, the pressure is on interest rates the world over. And that is reflected in bond yields, with the 10-year government bonds of the US, UK and Germany standing at 4.5%, 4.9% and 3.0% respectively.

The yield in the UK has actually fallen a bit over the past week after weaker than expected inflation last week and reassuring words from Labour leadership contender Andy Burnham. He eased market fears by suggesting he would stick to the current leadership’s spending constraints. But more generally, the direction of travel for bond yields is upwards as investors fret about rising interest rates and longer-term inflation concerns.

As bond yields rise, fixed income investments typically become more highly correlated with equity markets. Rising bond yields lead to lower bond prices and can also put pressure on equity prices if the competition from more secure fixed income investments becomes more tempting for investors.

Bond yields are in the 4.5-5% range at which further rises become a problem for stock markets. And that is particularly the case after a period of strongly rising markets which make investors question whether shares are now too expensive. The key question today is whether equities can hold up in the face of further rises in bond yields.

So far, the focus has been more on rising corporate earnings, which have kept valuations in check. The recently completed earnings season delivered another quarter of buoyant profits. So, another key question is the extent to which earnings can keep rising in the face of higher oil prices.

And this is where the now 13-week-long US-Iran conflict comes in. Once again, the US side has talked up the likelihood of successful peace talks over the weekend. And once again, we have entered a new trading week with no obvious end to the hostilities in sight.

No-one expected the Strait of Hormuz to remain closed as long as it has. And anyone who did consider that possibility will have been surprised by the apparent lack of economic impact. So, a further as-yet-unanswered question is how robust economic growth can be in the face of higher energy costs.

For now, though, earnings have continued to grow, and valuations have nudged higher. That’s the best possible combination for markets because the level of the market is the result of putting together growth and valuation. Often the two move in opposite directions. Occasionally, as now they move together.

For the market to keep rising in the face of an earnings reversal would require valuations to keep rising and that in turn would need sentiment to remain bullish.

Which is where the ongoing AI narrative, and more specifically, the upcoming flotations of SpaceX, Anthropic and OpenAI enter the equation.

With SpaceX looking likely to be the biggest flotation ever, there is plenty of interest from investors. A key feature of the IPOs will be the impact of new ‘fast entry’ rules that could put the stocks straight into the indices tracked by passive funds. The huge size of the companies ensures billions of dollars will automatically flow to them, potentially pulling money away from other listed companies.