2026 Weekly Update

Market update

The S&P 500 closed the week at 7’500.58, +1.44% higher. The Dow Jones closed at 51’564.7, +1.41%, with the Nasdaq higher by +2.74%. The volatility index VIX closed the week at 16.4, down from 19.44. The Euro Stoxx 600 rose +0.38%.

The 10-year UST closed at 4.45%, down from 4.48% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 70bps. US Corporate Bond spreads: Investment Grade spreads narrowed -1bp at 76bps and High Yield spreads narrowed -17bps at 303bps. German 10-year Bunds yield closed at +2.98% down from +2.99% a week before. In Europe, Corporate Investment Grade spreads were flat at 89bps and High Yield narrowed -2bps at 313bps. 

The US Dollar Index (DXY) appreciated +1.10% last week and closed at 100.85. The Euro closed at 1.1471 (-0.84%); the Yen depreciated -0.66%, closing at 161.3 and the Swiss Franc depreciated -1.25%, closing at 0.8071. Gold closed at $4’155.71, depreciating -1.51%. Oil was lower, Brent closed at $80.57 (-7.74%) and WTI at $76.6 (-12.67%).

Macroeconomy

FOMC meeting

The Federal Reserve kept rates unchanged but delivered a hawkish surprise, with nine FOMC participants projecting rate hikes - much more than expected. Chair Warsh did not provide dovish guidance or push back on market pricing, leading to a market reaction that now fully prices in a rate hike by October, with some probability as early as July. The committee is split, but the core appears to favor holding rates for now, with the risk of hikes having increased compared to prior meetings. Warsh’s press conference emphasized price stability, with no dovish take on inflation. He noted that policy restrictiveness is uneven—restrictive in housing but not elsewhere—and that the labor market remains stable. Warsh did not push back on market reactions, instead suggesting that unfiltered market responses are important for the Fed. The inflation projections for 2026 were revised up, and the committee is preparing for possible hikes, but we think the core of the voting members remains in a wait-and-see mode. Warsh also highlighted some dovish leanings: strong productivity-led growth is welcomed, and he does not believe in a strict trade-off between inflation and unemployment. He suggested the supply side may expand, reducing inflationary pressure over time. Warsh set up five new task forces. He is prioritizing longer term goals as ability to generate a dovish outcome is limited due to data and committee shift. Analysts expect less communication, higher rate volatility, smaller balance sheet, and potentially some dovish arguments coming out of the studies for data, productivity, and the inflation framework.

Bank of England

The Bank of England (BoE) held rates steady at 3.75% in a 7-2 vote, with one additional dissent in favor of a hike. The outcome reflects an “active hold,” with the Bank maintaining a hawkish tone and relying on tighter financial conditions to achieve policy objectives without delivering an actual rate increase. Governor Bailey noted that inflationary pressures from the Iran conflict are already in the pipeline, but weak economic activity could help contain second-round effects. The BoE keeps the option open for modest hikes if needed but does not signal any urgency. At the same time, UK headline inflation remained unchanged at 2.8%, surprising to the downside, driven by declines in core goods and food prices, while energy prices remained stable. Services inflation rose in line with consensus, reflecting negative base effects. Core inflation was overall more contained than expected, with few signs of second-round effects given the current weakness in the labor market. Payroll employment remains soft, with vacancies contracting in the latest employment report. Aggregate wage growth was stronger than expected, mainly due to robust public sector pay awards. In contrast, private sector wage growth continues to ease, suggesting subdued underlying inflationary pressures.

Bank of Japan

The Bank of Japan delivered a 25bps rate hike as expected, taking their policy rate to its highest since 1995, at 1%. They also signaled further hikes to come, and their statement said that “given that underlying CPI inflation has been approaching 2 percent and financial conditions have been accommodative, the Bank will continue to raise the policy interest rate”. Moreover, they also announced they’d stop tapering their monthly JGB purchases in the months ahead. Currently, the BoJ is purchasing 2.7tn yen per month, with monthly purchases set to decline by 200bn yen each quarter through Q1 2027. From April 2027 onwards, purchases are expected to stabilize at around 2tn yen per month.

Swiss National Bank

The Swiss National Bank (SNB) has once again left its key interest rate at 0%, as expected. The central bank said it is prepared to intervene in the foreign exchange market to stabilize the franc. The SNB announced on Thursday, as part of its quarterly monetary policy assessment, that its readiness to intervene in the foreign exchange market remains high. The SNB has been referring to an “increased readiness” since last March. Due to the rise in energy prices, the SNB’s conditional inflation forecast for the coming quarters is slightly higher than in March. However, the central bank emphasized that medium-term inflationary pressures have hardly changed since the last assessment. The SNB’s growth forecast for the Swiss economy remains unchanged at around 1% for the current year and around 1.5% for 2027.

Reserve Bank of Australia

The Reserve Bank of Australia also left rates unchanged this morning. The move was widely expected, and keeps their cash rate at 4.35% after hiking at the last 3 meetings. However, even as they held rates for the first time this year, the statement also explicitly suggested they might hike again if needed, whilst warning that “headline and underlying inflation are still too high”.

Norges Bank

Norges Bank (Norway) kept its policy rate at 4.25% in June, highlighting persistent inflation above target due to high business costs and slightly stronger inflationary pressures than expected. The Committee indicated a likely rate hike at an upcoming meeting if current trends persist, while noting that economic growth is slightly weaker, capacity utilization is drifting down, and unemployment is stable but showing some signs of increase. The policy rate is now forecast to be just above 4.5% by year-end, with inflation expected to reach 2% by 2029. The outlook remains uncertain, especially regarding global energy markets and the krone, and the Committee stands ready to adjust the policy rate as needed based on future economic developments.

Riskbank

Sweden’s Riksbank left its policy rate unchanged at 1.75% as expected, but raised its policy rate forecast for year-end up 5bps to 1.82%.

US data

US housing starts saw an unexpectedly big drop in May, falling to an annualized pace of 1.177m (vs. 1.430m expected), which was the lowest since May 2020 during the pandemic. The NAHB’s housing market for June unexpectedly fell to 35 (vs. 37 expected). Also, industrial production was only up +0.1% in May (vs. +0.3% expected), albeit with a two-tenths positive revision to the April reading. Then the Empire State manufacturing survey fell more than expected to 5.7 (vs. 13.7 expected).

EU data

The European Parliament voted in favor of the EU trade deal with the US agreed last year, by a 440-151 margin. Although the deal was initially reached last summer, there had been several delays to the ratification process, including earlier this year when Trump was threatening to annex Greenland. In Germany, the ZEW survey showed the expectations measure rising more than expected to 10.5 in June (vs. -5.5 expected), a 4-month high. However, the current situation measure fell more than expected to a 6-month low of -81.0 (vs. -78.0 expected).

Asia data

Japan’s trade deficit narrowed unexpectedly to ¥378.7bn in May (vs. ¥547.6bn expected), supported by robust export growth of +17% y-o-y on strong demand from the US and China. Imports also rose (+12.5% y/y) but came in slightly below expectations. Meanwhile, April’s trade surplus was revised down to ¥299.3bn. In China, activity data for May was released, which showed retail sales down by -0.6% on a y-o-y basis (vs. -0.2% expected). Meanwhile, fixed asset investment over the first five months of the year was also down -4.1% compared to the previous year (vs. -2.3% expected). That said, there were some upside surprises, with industrial production up +4.5% y-o-y in May (vs. +4.4% expected).

Highlights

Oil update

We have seen oil prices coming down and then staying rangebound on the back of the latest US-Iran memorandum. The longer end of the oil curve has barely moved, signaling market relief but continued caution. Iranian crude exports are expected to rebound by over 1 million barrels, while Russian exports have also increased, though new sanctions may counteract this. Gulf countries are likely to increase supply, and despite tanker flows being low, inventories in the Gulf have declined, indicating successful exports. Additional supply from these countries is expected to push prices lower, but strong demand in the coming months could provide support. OECD and global inventories have dropped significantly, with advanced economies seeing a 250-million-barrel decline. Floating inventories are also down, prompting countries to rebuild stocks. The market is in a state of undersupply, with May data showing a 6-million-barrel deficit. Demand, especially in Southeast Asia, is expected to remain resilient through the summer, supporting prices, though current levels below USD 80 may not reflect fundamentals. 

FX update

The Federal Reserve’s hawkish stance and strong US growth momentum have reinforced the strength of the US dollar. Rate differentials continue to favor the USD, with US economic growth expected to remain resilient while other regions have experienced downward revisions. Furthermore, the dollar has shown a tendency to appreciate in the six months ahead of a Fed rate hike. This pattern is expected to persist through the summer unless there is a significant repricing of rate expectations. Speculative positioning shifted into dollar longs after being net short until mid-March. Current estimated positioning is around USD 30bn, with a sharp increase over the last week. The fallout from monetary policy divergence has started to show up across currency pairs with the yen particularly weak despite intervention efforts. The yen’s weakness is driven by investor perception that the BoJ remains behind the curve (despite their best efforts to push back on this view) and fiscal concerns, with the yield curve spread remaining wide. The yen remains a funding currency, and while short positioning is extended, a sharp reversal is unlikely without a clear fundamental catalyst. In EUR and GBP, more than one rate hike is still priced in for both regions. Easing inflationary pressures should reduce the likelihood of further hikes, creating downside risk for sterling and the euro against the dollar.

On rates

Global rates markets experienced a hawkish repricing last week, driven primarily by the Federal Reserve's latest policy decision. Wednesday's meeting pushed markets to revise their expectations: 39bps of Fed tightening are now priced by December, up from 21bps at the start of the week. The repricing triggered a flattening of the Treasury yield curve, with the 2-year yield rising 9.6bps to 4.18%, while the 10-year yield fell 2.6bps to 4.45%. A similar dynamic played out in Europe, where Germany's 2-year bund yield rose 2.7bps to 2.64%, even as the 10-year bund yield edged down 1.0bp to 2.98%. In Asia, the 10-year JGB yield edged down to 2.61% from 2.63% the prior week, as investors weighed the BoJ's decision against ongoing geopolitical developments in the Middle East. The yen weakened to JPY 160.8 against the dollar from JPY 160.2, heightening speculation over a potential intervention by Japanese authorities to support the currency. 

What to watch

• Monday: Canada CPI; China Loan Prime Rates
• Tuesday: US ADP Employment; US PMIs; UK PMIs; Eurozone PMIs; Japan PMIs; Australia PMIs
• Wednesday: Germany IFO; Australia CPI  
• Thursday: US PCE; US Personal Income & Spending; US Durable Goods Orders; US Initial Jobless Claims; Australia Employment      
• Friday: US University of Michigan Consumer Survey; ECB CPI Expectations; Japan CPI