2026 Weekly Update

Market update

The S&P 500 closed the week at 7,580.06, +1.43% higher. The Dow Jones closed at 51,032.46, +0.90%, with the Nasdaq higher by +2.39%. The volatility index VIX closed the week at 15.32, down from 16.7. The Euro Stoxx 600 rose +0.14%.

The 10-year UST closed at 4.44%, down from 4.56% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 76bps. US Corporate Bond spreads: Investment Grade spreads narrowed -1bp at 76bps and High Yield spreads narrowed -4bps at 316bps. German 10-year Bunds yield closed at +2.94% down from +3.04% a week before. In Europe, Corporate Investment Grade spreads remained at 91bps and High Yield widened +3bps at 322bps.

The US Dollar Index (DXY) depreciated -0.30% last week and closed at 98.94. The Euro closed at 1.1659 (+0.48%); the Yen depreciated -0.06%, closing at 159.27 and the Swiss Franc appreciated +0.48%, closing at 0.781. Gold closed at $4,540.26, appreciating +0.68%. Oil was lower, Brent closed at $92.05 (-11.10%) and WTI at $87.36 (-9.57%).

Macroeconomy

US prices

US PCE price index (the Fed's preferred inflation measure) rose 0.4% m-o-m in April, down from 0.7% in March and slightly below expectations. The y-o-y rate increased to 3.8% from 3.5%. Core PCE (excluding food and energy) rose 0.24% m-o-m, lifting the y-o-y rate to 3.3% - the highest since November 2023. Core goods prices increased 0.30% m-o-m and 2.8% y-o-y, while shelter prices rose 0.53% m-o-m, pushing the y-o-y rate to 3.2%. AI-related inflation continued to support core goods PCE. Real personal spending grew just 0.1% m-o-m, after a 0.3% rise previously, indicating more cautious consumer behavior. Inflation remains high and risks tilted to the upside. From Fed speakers, we heard from NY Fed President Williams saying that monetary policy “is right where we want it to be”. Admittedly, there was discussion of a hike, with St Louis Fed President Musalem acknowledging there “there is a scenario where the economy might require a rate increase”, but that was still conditional.

US data

US data was mixed. The second GDP estimate for Q1 showed that growth was weaker than previously thought earlier this year, only running at an annualized +1.6% (vs. +2.0% before). May consumer confidence in the US edged lower but outperformed expectations (93.1 vs. 92.0 expected) as last month’s reading was revised up from 92.8 to 93.8. While assessment of the present situation deteriorated, expectations unexpectedly ticked up to a 5-month high of 74.4 (vs. 71.9 expected). So overall this Conference Board data was more upbeat than the historic lows seen in the University of Michigan consumer survey the previous week. The Dallas Fed manufacturing outlook ticked up to a 10-month high but with the Philadelphia Fed services survey unexpectedly deteriorated (-23.6 vs -13.0 expected).  And the S&P Case-Shiller house prices index fell for a second month running in March (-0.16% m-o-m vs. -0.10% expected), continuing to lose the momentum it had gained late last year.

European Central Bank

The accounts from the ECB’s last meeting in April said that “a number of members noted that the decision was a close call and that they would not have opposed raising rates at the current meeting had this been on the table.” However, it ultimately said that “all members were willing to rally behind the decision to keep policy rates unchanged”, so long as the communication stressed a commitment to ensuring “that inflation stabilized at the target in the medium term”. In terms of ECB speakers, Isabel Schnabel said that “given the size and the persistence of the current shock, looking through is no longer an option in my view”.  She added that “from today’s perspective, I think a rate hike in June will be needed”, “even if the war ended today, a lot of damage has already been done to energy infrastructure and global supply chains. So, even then, I believe that a monetary policy reaction would be needed”. By contrast, ECB Chief Economist Lane avoided pre-committing to any decision, while noting the likely “further upward adjustment to the inflation forecast in June” and expectations of “indirect effects beyond energy prices”.

European data

After last week’s weak flash PMI data, the European Commission’s survey was more upbeat. The euro area Economic Sentiment Indicator (ESI) rose to 93.5 in May from 93.2, beating expectations. The improvement was due to less pessimism among consumers and services firms, though manufacturer sentiment worsened. Both the ESI and PMIs still point to stagnating or slightly negative growth in Q2. However, the stabilization in consumer and services sentiment suggests some resilience in the economy. The data also indicate limited pricing power for companies, with selling price expectations easing slightly in May but remaining elevated.

Japan data

The Tokyo CPI print for May was softer than expected, with headline inflation unexpectedly slowing to +1.4% (vs. +1.6% expected), whilst core-core inflation fell to +1.6% (vs. +1.8% expected).

China data

Over the weekend China's official manufacturing and non-manufacturing PMI came in at 50.0 (in-line with consensus, 50.3 last month) and 50.1 respectively (consensus 49.5, 49.4 last month). The private sector manufacturing PMI came in at 50.1, four tenths of a percent higher than last month.

Australia & New Zealand Australia

CPI inflation increased by +4.2% y-o-y in April, which is softer than the anticipated +4.4% and also represents a decrease from the +4.6% rise observed in the previous month. However, underlying in

Highlights

Inflation expectations

Market participants have shifted from pricing rate cuts before the war to pricing rate hikes, and mainly insurance hikes, across major central banks. Expectations have increased further during May, with markets now pricing around one hike for both the BOE and BOJ, and two hikes for the ECB. Elevated energy prices remain the main driver of higher inflation expectations, particularly in Europe and the UK, while the US appears relatively less exposed. The brent future curve remains in steep backwardation, although recent price action suggests tentative signs of moderation as discussions around a potential US-Iran agreement continue. Short-term market inflation expectations declined this week following last week’s peak, with UK inflation expectations moving back below 4% and Japanese expectations stabilizing. Despite the recent increase, inflation expectations remain significantly below the peak levels reached in 2022 during the last energy shock. Long-term inflation expectations continue to remain relatively well anchored, standing around 2.1% in Europe and 2.4% in the US. Consumer inflation expectations show a similar pattern, with short-term expectations being elevated but long-term expectations remaining broadly stable. Market-based and consumer inflation expectations remain broadly aligned across regions. Long-term sovereign bond yields declined modestly this week as term premia retraced part of last week’s sharp increase driven by inflation and political concerns. If energy prices continue to moderate, sovereign bond yields may have already reached their peak following the recent sell-off.

On rates

The week was marked by significant developments in the fixed income and rates markets, with a particular focus on interest rate derivatives and swaps. The period was shaped by a combination of macroeconomic data, shifting Federal Reserve expectations, and evolving correlations between rates and other asset classes, notably oil. That decline in oil prices meant fears about inflation continued to ease. For instance, the Euro 1yr inflation swap fell -38.1bps to 3.24%, and the US 1yr inflation swap fell -10.2bps to 3.01%. So investors also dialed back their expectations for rate hikes too, with a Fed hike by December down to 57% by the close on Friday, having been at 95% the previous week. Similarly at the ECB, the number of hikes priced by December fell from 65bps to 53bps by Friday’s close. And in turn, sovereign bonds rallied around the world, with the 10yr Treasury yield falling -12.2bps last week to 4.44%, whilst the 10yr bund yield fell -10.0bps to 2.94%.

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