2026 Weekly Update

Market update

The S&P 500 closed the week at 7’431.46, +0.65% higher. The Dow Jones closed at 51’202.26, +0.66%, with the Nasdaq higher by +0.70%. The volatility index VIX closed the week at 17.68, down from 21.51. The Euro Stoxx 600 rose +1.69%.

The 10-year UST closed at 4.48%, down from 4.53% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 77bps. US Corporate Bond spreads: Investment Grade spreads widened 1bp at 77bps and High Yield spreads widened 6bps at 320bps. German 10-year Bunds yield closed at +2.99% down from +3.04% a week before. In Europe, Corporate Investment Grade spreads widened 1bp at 89bps and High Yield widened 3bps at 315bps. 

The US Dollar Index (DXY) depreciated -0.32% last week and closed at 99.75. The Euro closed at 1.1568 (+0.40%); the Yen appreciated +0.03%, closing at 160.24 and the Swiss Franc depreciated -0.13%, closing at 0.7971. Gold closed at $4’219.33, depreciating -2.52%. Oil was lower, Brent closed at $87.33 (-6.19%) and WTI at $84.88 (-6.25%).

Macroeconomy

US prices

Headline CPI rose to 4.2%, the highest in several years, mainly driven by energy prices, while food inflation was moderate. Core CPI increased by 21bps, slightly below consensus, with the y-o-y rate at 2.9%. The details reveal firmer underlying inflation, especially in super core services which have yet to decelerate meaningfully. The PPI data also showed continued strength in financial services, suggesting that core PCE is likely to print around 35bps, with a risk of running up to 2.4% m-o-m and 3.4–3.5% y-o-y, well above the Fed’s 2% target. This inflation backdrop keeps the Fed cautious about imminent policy moves. Also, PPI inflation ran hotter than expected in May, with headline PPI up +1.1% on the month (vs. +0.7% expected). However, there was a downward revision of three-tenths to the April number, and the PPI measure excluding food and energy was only at +0.4% (vs. +0.5% expected).

Fed meeting

For the upcoming FOMC meeting, the policy rate is expected to remain on hold, with the easing bias likely to be removed from the statement. No major dissent is anticipated on the decision, though there could be some on the statement itself. The dot plot is expected to show no rate cut in 2026, with some members possibly indicating hikes, and the 2027 dot moving up to show one cut or even no change. The longer-run dot may also move higher, reflecting upside risks to the neutral rate from ongoing CapEx cycles, particularly in AI. Chair Warsh’s first press conference is expected to be the main event, and he will likely opt for strategic ambiguity. If he emphasizes patience and data dependence, the tone may be interpreted as dovish; if he avoids forward guidance and does not push back on market pricing, it could be seen as hawkish. No major changes are expected on the balance sheet, with reserve management purchases already downsized. The market will closely watch for any signals that could trigger volatility, given the potential for misinterpretation in a new chair’s debut.

ECB

The European Central Bank (ECB) raised its policy rates by 25bps, marking the first increase since September 2023. President Lagarde stated that “the hike was unanimous, without reservations.” There were no major surprises in the press statement, and, as expected, the tone during the Q&A session was decidedly hawkish. Lagarde pushed back against the idea of an “insurance hike,” clarifying that the move is not “insurance,” nor “forceful,” but rather a “signal.” She described the decision to raise rates as “robust across a range of scenarios.” On inflation, Lagarde noted that there are signs of a “broadening of price pressures.” Overall, the duration of the Middle East conflict remains a key factor for the policy outlook, and a second rate hike is still possible. The ECB appears to downplay the downside risks to growth and maintains a very hawkish stance on inflation and the potential for second-round effects. Indeed, the ECB seems even more concerned about potential second-round effects and now requires stronger evidence from the data to avoid another hike—in other words, the burden of proof has shifted. The July meeting will be closely watched, but a clear catalyst will likely be needed for the central bank to consider consecutive rate hikes.

BoJ

Investors expect the Bank of Japan (BoJ) to hike its main policy rate to 1% this week, for the first time since December last year. A recent speech from Governor Ueda signaled a possible shift in the BoJ’s reaction function, including a greater sense of urgency due to growing concerns about financial stability—particularly the sell-off in Japanese government bonds (JGBs) and yen depreciation, which is exacerbating inflation pressures. Inflation expectations have risen, and the BoJ will remain very sensitive to any signs of a potential de-anchoring of medium-term expectations. That said, the BoJ is expected to proceed cautiously, as risks to growth are also increasing with energy prices remaining elevated. However, the BoJ is likely to maintain a tightening bias going into the second half of the year, with another hike possible by December. This would leave policy rates at the low end of the BoJ’s estimate of the neutral rate. Meanwhile, according to media reports, the BoJ may also decide to slow or suspend the pace of reduction in JGB purchases (QE tapering) with the aim of stabilizing long-term yields, even as the balance sheet continues to shrink.

SNB

The Swiss National Bank (SNB) is expected to keep its policy rate unchanged at 0% at this week’s meeting. The overall message is likely to remain broadly consistent with the March decision. Unlike other central banks, which are concerned about upside inflation risks stemming from higher energy prices, the SNB has made it clear to be more concerned about disinflationary pressures resulting from the strength of the Swiss franc. Analysts anticipate that the SNB will once again highlight the high level of uncertainty in the current environment and reiterate its March guidance that it will “monitor the situation closely and adjust its monetary policy if necessary, in order to ensure price stability over the medium term”. In particular, the SNB is likely to emphasize its readiness to intervene in the foreign exchange markets.

BoE

The Bank of England (BoE) is expected to remain on hold at its next meeting, reflecting a balance between persistent inflationary pressures and softening economic growth. Recent data show a further decline in inflation, weak employment figures, and a contraction in April GDP. The BoE’s approach is more cautious than the ECB’s, recognizing the trade-off between inflation and growth risks. The Bank’s communication could be balanced, as it acknowledges tighter financial conditions, with market expectations having shifted from two rate cuts to two rate hikes. However, as the Middle East conflict remains unresolved and oil prices remain elevated, the Bank will likely keep the door open for potential rate hikes, especially as there may be more dissenters voting for an increase. Next week’s data releases (CPI and labor market) would need to deliver a significant hawkish surprise to challenge the market’s view that the Bank will remain on hold in June.

BoC

Bank of Canada’s latest decision left the policy rate unchanged at 2.25%, as was widely expected, and kept the options open given the current uncertainty. Governor Macklem suggested that if higher energy prices led to higher inflation, “there may be a need for consecutive increases in the policy rate”. At the same time he also suggested that additional US trade restrictions could mean they “may need to cut the policy rate further to support economic growth”. Against that backdrop, Canadian bonds saw a relative outperformance yesterday, with the country’s 10yr yield (+0.9bps) seeing a modest increase to 3.49%.

China data

China showed consumer inflation in May coming in slightly below expectations, highlighting subdued domestic demand. Headline CPI rose +1.2% y-o-y, marginally under the +1.3% consensus and unchanged from the previous month. By contrast, producer prices accelerated sharply, with PPI up +3.9% y-o-y, in line with expectations and the strongest reading since August 2022. The pickup was largely driven by higher energy costs linked to developments in the Middle East, marking a notable acceleration from April’s +2.8% pace. Also, both exports and imports grew at an accelerated rate in May, exceeding forecasts as surging demand for AI hardware mitigated the impact of disruptions caused by the war in Iran. Exports surged by +19.4% y-o-y in May, surpassing expectations of a +15% increase. This significant rise was partly fueled by a weak performance last year, during the US-China trade war. Imports soared over +27% y-o-y in May, resulting in a trade surplus of $105.4 billion, the largest since January.

Highlights

Gold

Gold has been experiencing a selloff after reaching new highs earlier this year, as the market appears to be facing a historic liquidity squeeze. Three main factors are driving the decline: First, the opportunity cost of holding gold has increased as persistent energy inflation has pushed back expectations for Fed rate cuts, making US real yields more attractive and weighing on the non-yielding metal. Second, during this period of equity market volatility, institutional investors are turning to gold as a source of liquidity, selling positions to cover losses or to make space for AI-related investments. Finally, while geopolitical tensions in the Middle East would typically support gold, this time the focus shifted to rising oil prices and the risk of prolonged inflation, which reinforced the “higher for longer” rates narrative and temporarily overshadowed gold’s safe-haven appeal. 

On rates

Markets experienced significant moves last week, largely driven by shifting geopolitical dynamics in the Middle East. Initial tensions pushed yields higher, but as the situation de-escalated and oil prices dropped to multi-month lows, concerns about a broader stagflationary shock eased. This shift in sentiment led investors to adopt a more dovish outlook on future rate moves. In the US, the probability of a Fed rate hike by December, which had been fully priced at the start of the week, fell to 82% by Friday. As a result, the 10-year Treasury yield declined by 5bps, while the 2-year yield briefly dipped below 4.04% before rebounding to around 4.07%. In Europe, sovereign yields also retreated, with the 10-year bund yield falling 5bps, as markets largely looked past the ECB’s 25bp rate hike, which was anticipated. In Japan, attention turned to the upcoming Bank of Japan meeting, with the 10-year JGB yield easing to 2.63% from 2.66%. 

What to watch

• Monday: US Empire Manufacturing
• Tuesday: US ADP Employment; Germany ZEW Survey; Australia RBA Cash Rate; Japan BoJ Policy Rate; China May Data
• Wednesday: FOMC, US Retail Sales; Sweden Riksbank Policy Rate; UK CPI; Eurozone CPI; Singapore Exports
• Thursday: US Initial Jobless Claims; Switzerland SNB Policy Rate; UK BoE Bank Rate; UK Weekly Earnings; UK Makerfield local election
• Friday: UK Retail Sales; Japan CPI