2026 Weekly Update

Market update

The S&P 500 closed the week at 7’473.47, +0.88% higher. The Dow Jones closed at 50’579.7, +2.13%, with the Nasdaq higher by +0.45%. The volatility index VIX closed the week at 16.59, down from 17.82. The Euro Stoxx 600 rose +3.52%.

The 10-year UST closed at 4.56%, down from 4.59% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 88bps. US Corporate Bond spreads: Investment Grade spreads narrowed -1bp at 77bps and High Yield spreads narrowed -11bps at 320bps. German 10-year Bunds yield closed at +2.95% down from +3.15% a week before. In Europe, Corporate Investment Grade spreads were unchanged at 91bps and High Yield widened 19bps at 319bps. 

The US Dollar Index (DXY) appreciated +0.05% last week and closed at 99.24. The Euro closed at 1.1641 (-0.09%); the Yen appreciated +0.02%, closing at 158.9 and the Swiss Franc appreciated +0.23%, closing at 0.783. Gold closed at $4’573.58, appreciating +0.51%. Oil was lower, Brent closed at $96.14 (-14.24%) and WTI at $96.6 (-8.37%).

Macroeconomy

FOMC minutes

The FOMC minutes showed most officials expect a rate hike if inflation remains above the 2% target. The committee kept rates at 3.5–3.75% at the last meeting, with four dissents, the most since 1992. The participants noted that inflation remained elevated, driven by persistent increases in core goods prices—partly due to tariffs—as well as higher fuel and energy costs, supply disruptions from Middle East conflicts, and rising prices in the information technology sector. While longer-term inflation expectations were stable, near-term expectations had risen, and most participants now saw a greater risk that inflation would take longer to return to the 2 percent target. Some anticipated that higher productivity and slowing housing service prices could help ease inflation, but strong AI investment and the potential for higher tariffs could add further pressure. Regarding the labor market, there were signs of potential softness, such as job growth concentrated in a few sectors, declining job availability, and modest wage growth, though conditions were expected to remain stable in the near term, with downside risks to employment. In the private credit sector, recent investor withdrawals from certain funds were not seen as an immediate systemic risk, but concerns remained that further losses could spill over to other markets or restrict financing for firms reliant on private credit.

Fedspeak

On Friday, Governor Waller gave a hawkish speech. He discussed how the recent labor market and inflation data had caused him to reevaluate the balance of risks with inflation becoming the “driving force” behind monetary policy in the near term. In particular, he noted that he would support changing language in the statement to remove the easing bias and make it clear that “a rate cut is no more likely in the future than a rate increase”.

US data

The final University of Michigan sentiment report for May showed 1-year and 5-10-year inflation expectations at 4.8% and 3.9% respectively, up 10bps and 40bps m-o-m. On the report comments: “this month’s increase in long-run expectations reflects sizable jumps among independents and Republicans”. The jump in expectations caused sentiment to deteriorate to a fresh record low – “sentiment is now just below the previous historical trough seen in June 2022”. Weekly initial jobless claims fell slightly to 209k in the week ending May 16 (vs. 210k expected), taking the 4-week moving average down to 202.5k, its lowest level since January 2024. US housing starts for April also fell by less than expected, to an annualized pace of 1.465m (vs. 1.410m expected). The exception was the Philly Fed business outlook, which saw a sharp drop to a five-month low. Finally, US pending home sales accelerated to +3.3% y-o-y in April (vs. +2.1% expected), their strongest annual pace since November 2024.

Global PMIs

US flash May PMIs were decent on the headline, but the details were net negative. Manufacturing jumped to 55.3, up from 54.5 and above the forecast of 53.8. S&P warned this was driven in part by stock building (as companies try and get ahead of tariffs and rising cost pressures) while services fell short (the services PMI fell to 50.9, down from 51 and below the forecast of 51.2), inflation surged (input price inflation surged to its highest since Nov. 2022 while average prices charged for goods and services rose in April at the fastest rate since Aug. 2022), and employment weakened (“the rate of job losses reaching the highest since August 2024 due to growing concerns over rising costs and deteriorating demand conditions”). In Europe, Flash May PMI was disappointing, highlighting the impact of higher energy prices on economic activity and inflation. The Euro area Flash PMI dropped by 1.3 points to 47.5, its lowest since October 2023. The services sector was hit hardest, with its index falling further into contraction (-1.2 points to 46.4) due to rising energy costs. In manufacturing, the temporary boost seen in April—driven by inventory building and anticipation of supply disruptions—has faded. New orders declined by 1.7 points to 49.8, and output fell by 1.4 points to 51.0. The ongoing closure of the Strait of Hormuz continues to push up input costs, accelerating input cost inflation. However, slower increases in output prices for both manufacturing and services suggest businesses are absorbing more of these costs, which helps contain inflation but squeezes company margins. Employment also declined, with companies reducing staffing levels in May. By country, in France, the composite PMI fell to 43.5, its lowest since November 2020. Even in the UK, which had held up relatively better in April, the May composite PMI was also in contractionary territory at 48.5. The composite PMI declined in both Australia (from 50.4 to 47.8) and in Japan (from 52.2 to 51.1). Both manufacturing and services PMIs saw a deterioration, but it is services that led the decline, falling to 47.7 in Australia and a 14-month low of 50.0 in Japan.

Japan data

Japan's economy expanded at an annualized rate of 2.1% in the first quarter of 2026 (compared to the +1.7% anticipated), driven by enhanced consumption and robust exports, thereby bolstering the argument for additional interest rate hikes by the BOJ. However, the outlook remains highly uncertain due to the ongoing conflict in the Middle East. The report indicates that the economy gained momentum during the January-March period, prior to the full effects of the war in Iran becoming apparent. Also, the Bank of Japan (BOJ) released its latest bond market survey which could help shed light on BOJ’s JGB purchase plan that will be reviewed in the June meeting, during which a plan for April 2027 onwards will be announced. Analysts expect no further or slower reductions of JGB purchases. Overall, BOJ’s holding of JGB could go down from currently close to 50% to around 35% by end 2027.

China data

PBOC (People’s Bank of China) left benchmark lending rates unchanged for a 12th straight month as authorities balanced the need to support weak domestic demand against rising inflation risks linked to higher global energy prices. The central bank kept one-year loan prime rate (LPR) at 3.00% and the five-year LPR at 3.50%, in line with market expectations. The latest activity data in China was weaker than expected. Retail sales were only up +0.2% y-o-y in April (vs. +2.0% expected), whilst industrial production was up +4.1% y-o-y (vs. +6.0% expected).

Highlights

On rates

Despite oil prices moving lower, US rates saw mixed movements last week, as investors interpreted hawkish signals from the Federal Reserve and increased the probability of a Fed rate hike this year, with 24bps of tightening now priced by December. This was reinforced by a spike in long-term inflation expectations in the University of Michigan survey and comments from Fed Governor Waller, who indicated support for removing the easing bias from the Fed’s statement. The 2-year Treasury yield rose by 5.1bps to 4.12%, reaching its highest level since February 2025, while the 10-year yield declined by 3.5bps to 4.56%. In Europe, sovereign bonds rallied strongly, supported by falling oil prices and weaker-than-expected flash PMIs. Investors reduced their expectations for further ECB rate hikes, with only 65bps now priced by December, down from 75bps the previous week. As a result, yields fell across the continent: the 10-year bund yield dropped by 12.9bps to 2.95%, and the 10-year gilt yield fell by 27.5bps to 4.90%, marking the largest weekly decline since 2023. In Asia, the yield on the 10-year Japanese government bond edged up to 2.76% from 2.72%, remaining near its highest level in about thirty years. Despite a softer inflation print, JGB yields stayed elevated as investors weighed the medium-term inflation outlook against ongoing concerns over fiscal expansion.

On Earnings

The Q1 2026 earnings season is ending and has proven particularly positive, with 94% of S&P 500 companies having reported and 84% delivering EPS beats. The blended y-o-y earnings growth rate stands at 28.4%, the highest since Q4 2021. Notably, all “Magnificent 7” companies exceeded EPS estimates, collectively surpassing forecasts by 32.5%, compared to 16.6% for the broader index. All eleven sectors posted annual revenue growth, led by Information Technology, Communication Services, and Utilities. Last week, Nvidia reported record fiscal Q1 revenue of $81.6 billion, beating expectations and announcing an $80 billion share repurchase alongside a dividend increase. However, shares slipped as results largely matched high investor hopes. Walmart, meanwhile, saw its shares fall after Q2 EPS guidance missed consensus and US comparable sales disappointed, with peer Costco also declining in response.

What to watch

• Tuesday: US Conference Board Consumer Confidence, Dallas Fed Manufacturing Activity; France April Retail Sales
• Wednesday: US Richmond Fed Manufacturing Index; China April Industrial Profits; France May Consumer Confidence; Australia April CPI
• Thursday: US April PCE, Personal Income & Spending, Durable Goods Orders, New Home Sales; Eurozone May Economic Confidence; Canada Q1 Current Account
• Friday: US April Advance Goods Trade Balance, MNI Chicago PMI; Germany May CPI; France May CPI; Japan May Tokyo CPI; Canada Q1 GDP