Macro
The macro backdrop is increasingly defined by a tightening constraint set between resilient growth, persistent inflation and limited policy flexibility. Incoming data continue to argue against recession, with U.S. labour conditions holding and payroll growth (~68K/month YTD) still sufficient to stabilise unemployment given the lower breakeven threshold. However, the distribution of outcomes has widened materially. Growth remains intact, but risks have shifted decisively toward inflation persistence, with supply-side shocks now the dominant driver rather than demand.
The key macro variable remains the U.S.–Iran conflict and its impact on energy flows. Despite a pause in the acute military phase, disruption through the Strait of Hormuz persists, keeping oil >$100/bl and anchoring elevated forward curves. While headline flow has been volatile, market pricing continues to reflect a base case of a fragile ceasefire and gradual progress toward a negotiated outcome, even as physical disruption to energy flows remains significant. Energy price action has also become increasingly volatile, with WTI rising 14.3% following two weeks of declines amid ceasefire expectations, reinforcing both the sensitivity to headlines and the absence of a stable equilibrium. The critical issue remains duration. A prolonged disruption transforms the shock from cyclical into structural, embedding a higher inflation floor and increasing the likelihood of second-round effects. Political dynamics on both sides point to a continued stalemate, with limited visibility on de-escalation and a non-linear risk of renewed escalation if economic pressure fails to force concessions.
This energy shock is reinforcing an already sticky inflation regime. U.S. services ex-rent inflation remains around a 3% pace, while electricity costs (+4.6% YoY) continue to rise due to structural grid investment and pricing frameworks. More broadly, the inflation impulse extends beyond crude into energy-intensive supply chains, including fertilisers, petrochemicals and industrial inputs, suggesting that part of the price pressure is already embedded even under a de-escalation scenario. The macro transmission is increasingly clear: geopolitical risk feeds energy, energy feeds inflation, and inflation constrains the policy response.
Manufacturing data are currently distorting the growth signal while reinforcing the inflation narrative. PMIs have rebounded across major economies, with U.S. factory output posting its strongest increase in four years and similar strength in Japan and France. However, this reflects front-loading and inventory accumulation as firms build safety stocks ahead of potential shortages, rather than underlying demand strength. As seen in previous tariff-driven cycles, this dynamic is likely to reverse as inventories normalise. In contrast, price components have accelerated sharply, with input costs and output prices rising across regions, indicating that manufacturing is amplifying inflation pressures while overstating near-term growth resilience.
The labour market remains resilient but non-inflationary, reinforcing the policy constraint. While headline job creation has slowed to ~68K/month, this remains broadly consistent with a stable unemployment rate given the sharp decline and increased uncertainty in breakeven employment growth – the pace of job creation required to keep unemployment unchanged. Recent estimates suggest this threshold has fallen from ~150K pre-adjustment to a wide range of 15K–87K, reflecting highly uncertain immigration flows and reduced labour force growth, implying that even modest job gains can be consistent with a stable labour market. Immigration restrictions have not translated into meaningful wage acceleration or labour shortages, with wage growth in migrant-heavy sectors (~3.5%) lagging the broader economy (~3.8%) and unemployment among U.S.-born workers edging higher. This highlights the dual supply-demand role of immigration and limits the risk of wage-driven inflation. At the same time, labour conditions are not weak enough to justify easing. The Fed remains in a mildly restrictive stance (~60 bps above neutral), and the reaction function has shifted toward patience. In a prolonged energy shock scenario, upside risks to inflation expectations could push policy back toward tightening rather than easing.
Regionally, divergence is becoming more pronounced. The U.S. continues to benefit from fiscal support and AI-driven capex, cushioning the energy shock, while Europe faces a more direct drag as a net energy importer, with growth already being revised lower. China remains stable but constrained by structural imbalances and limited policy stimulus. FX dynamics reflect a more nuanced regime, with the dollar retaining a safe-haven bid but showing reduced sensitivity to energy shocks, suggesting a gradual erosion in its hedge effectiveness. Structurally, rising AI and infrastructure investment are reinforcing a more capital-intensive, supply-constrained environment, supporting growth while embedding inflation persistence and reducing the reliability of duration as a hedge.
Overall, the global economy remains resilient but increasingly conditional. The key constraint is no longer growth, but inflation persistence driven by supply-side dynamics. The distribution of outcomes has widened, with downside growth risks still present but increasingly accompanied by upside risks to inflation and rates, reinforcing a more volatile, non-linear macro regime in which energy dynamics remain the primary driver of policy and market outcomes.
Rates
Rates markets traded in tight ranges but with rising underlying uncertainty, as cross-asset moves reinforced the shift toward an inflation-sensitive regime. Treasuries rallied into Friday but finished the week weaker, with front-end yields up 7–8 bps and the 30Y rising ~3bp to ~4.92%, the largest weekly increase since late March. The dollar strengthened (DXY +0.4%), while gold (-2.8%) and silver (-6.6%) declined, and Bitcoin was flat, pointing to tighter financial conditions without a clear deterioration in growth.
Despite a more challenging macro backdrop, the defining feature of the week was market composure. Rates absorbed rising inflation expectations, geopolitical risk, and Fed uncertainty without disorder. Implied volatility declined, and the curve remained range-bound, reinforcing that the market is not pricing a regime shift but rather a constrained policy path.
Front-end rates remain the primary adjustment channel. U.S. 2Y yields held near ~3.80%, while the 10Y stabilised around ~4.30%, effectively defining the current equilibrium range. Markets have repriced toward a “no cuts” baseline for 2026, with futures implying only ~6bp of easing and the first full cut pushed toward year-end. The key shift is that front-end repricing has been driven almost entirely by inflation expectations rather than real rates, with nominal pressure offset by a modest decline in real yields (10Y real ~1.88%).
Curve dynamics reflected a bear-flattening regime, with the 2s10s compressing toward ~42bp from ~70bp earlier in the year. However, positioning has materially adjusted, and the asymmetry is shifting. The recent flattening has largely priced the inflation shock into the front end, leaving the “pain trade” skewed toward re-steepening, particularly if inflation expectations stabilise or growth softens. The curve has also developed a more pronounced “positive butterfly” structure, with intermediate maturities relatively supported.
Inflation pricing remains firm but not unanchored. 5Y inflation swaps are holding near ~2.5%, and breakevens have widened modestly, signalling persistent near-term pressure while longer-term expectations remain contained. The key nuance is that markets are pricing a real inflation impulse, but not yet a structural inflation regime change, which explains why long-end yields remain relatively anchored despite the macro backdrop.
Policy expectations have tightened materially. The Fed is widely expected to remain on hold, with the inflation shock effectively removing near-term flexibility for easing. The debate has shifted from the timing of cuts to whether cuts are feasible at all without clearer labour market deterioration. A potential transition toward a Kevin Warsh-led Fed adds uncertainty, but markets recognise that outcomes remain committee-driven. Personnel matters at the margin; inflation and consensus dynamics dominate.
At the long end, valuation anchors remain intact. The ~4.25% level in the 10Y continues to act as a key equilibrium point, supported by real money demand and consistent with ~2% trend growth plus term premium. This anchoring explains why long-end yields have remained contained even as front-end expectations shifted higher. The market continues to distinguish between near-term inflation risk and long-run policy credibility, with the latter still broadly intact.
Credit
Credit markets remained supported by carry, but the risk/reward deteriorated as spreads stayed near cycle tight while dispersion increased. Public credit continues to reflect strong headline fundamentals, but valuations remain in the lower historical percentiles, offering limited compensation for macro shocks or a delayed easing cycle.
Private credit showed the clearest signs of stress, but importantly, not systemic fragility. Inflows declined ~60% YoY, while redemption requests increased across semi-liquid vehicles. Liquidity pressure is being absorbed via ~5% redemption gates, which are functioning as designed to prevent forced selling rather than amplify stress. This reinforces the view that the current phase is structurally different from bank-driven crises, with capital largely long-term and not subject to immediate withdrawal pressure.
The market is now transitioning from liquidity stress to credit-quality discovery. Sector concentration remains a key vulnerability, with an average software exposure of ~25% in some private-credit portfolios. Refinancing has pushed maturities into 2028–2029, reducing near-term default risk but extending the cycle and increasing reliance on operational performance. While billings and retention metrics remain stable, forward visibility is limited, with Q2–Q3 expected to be more revealing, particularly for pre-2022 vintage loans.
BDC data continues to argue against systemic deterioration but confirms early-stage pressure. Troubled borrowers are ~0.5% in non-traded BDCs and ~2.0% in traded BDCs (down from 2.5%), suggesting stability at the surface but likely lagging underlying stress. The expectation remains for gradual normalisation higher, with more visible deterioration likely in Q3–Q4, rather than an abrupt shift.
Market structure is increasingly bifurcated. In leveraged loans, ~10% of the market is trading at ≤$0.80, effectively pricing in elevated default risk. This indicates that stress is being isolated in weaker credits, rather than transmitted through broad spread widening. In contrast, private-credit spreads have widened ~50 bps, though limited price discovery suggests this understates true repricing.
Valuation pressure is emerging more clearly. Loans marked as low as ~$0.69 on the dollar highlight the growing gap between reported NAVs and secondary clearing levels. This is less a liquidity issue and more a transparency and trust issue, particularly in retail-heavy vehicles, where valuation methodologies are less frequently market-tested.
From a structural perspective, private credit remains significantly less levered than pre-GFC financial institutions, with leverage typically around 1.25x vs ~30x for pre-2008 banks, and a much higher equity buffer. This reduces systemic risk but reinforces the current dynamic: losses are absorbed gradually through marks and equity capital, rather than triggering forced deleveraging cycles.
The maturity wall remains a key medium-term driver. With debt pushed into 2028–2029, refinancing risk has been deferred rather than resolved. Outcomes will depend on sponsor behaviour, with equity injections and deleveraging supporting credits, while weaker assets may transition to lender control at discounted valuations. This creates an opportunity for disciplined capital, but increases downside for legacy portfolios.
Overall, the credit market is transitioning from a liquidity-driven phase to a selection-driven phase. Carry remains attractive, but only when paired with strong underwriting, conservative leverage and sponsor support. The key risk is not systemic dislocation but mispriced dispersion, particularly in software-heavy portfolios, PIK-heavy structures, and retail-driven vehicles, where valuation credibility remains under pressure.
Equities
U.S. equities extended their rally, with the S&P 500 +0.55%, Nasdaq Composite +1.50%, and Dow -0.44%, while the Russell 2000 rose +0.36%. The S&P 500 and Nasdaq notched a fourth consecutive weekly gain, both closing at fresh all-time highs, with small caps extending to a fifth straight advance. However, breadth deteriorated, with the equal-weight S&P down -0.6%, reinforcing continued concentration in large-cap leadership.
More importantly, the week reinforced a clear shift in market behaviour: equities are increasingly selective rather than broadly risk-on. Investors are willing to look through geopolitical volatility so long as three conditions hold: earnings remain resilient, AI capex continues, and energy prices do not enter a destabilising regime. In effect, the market is treating the conflict as a macro cost headwind rather than a trigger for de-risking.
Sector performance reflected that dynamic. Energy (+3.21%) and technology (+3.09%) led, while healthcare (-3.09%) and financials (-1.88%) lagged. Semiconductors remained the dominant driver, with the PHLX Semiconductor Index up 10% and extending a multi-week rally, supported by AI demand and hyperscaler spending. Software was mixed following weakness in ServiceNow, while cyclicals underperformed. Retail-driven and high-short-interest names also lagged, pointing to fading speculative positioning.
Earnings continue to anchor the market, with Q1 blended growth above 15% and elevated beat rates. However, the reaction function is weakening, with upside increasingly priced in. AI-linked demand remains the core driver, with strong results from Intel and Texas Instruments reinforcing the strength of the semiconductor and industrial ecosystem.
At the single-stock level, leadership continues to reflect a mix of AI, healthcare, and platform-driven catalysts. UnitedHealth Group rose +9.3% after beating and raising guidance, while Tesla gained +6.1% on stronger FCF despite rising capex concerns. Amazon added +5.3% after announcing a $25B investment in Anthropic, reinforcing the scale of AI infrastructure commitments. In contrast, IBM fell 8.5% despite a beat, with weakness in software offsetting strength in infrastructure.
The AI narrative is evolving from a growth theme into a full capital cycle. Hyperscalers are deploying capital at an unprecedented pace, with infrastructure spend already in the hundreds of billions annually and expected to scale materially further. This is shifting value creation beyond software into semiconductors, power, and physical infrastructure, effectively turning AI into an industrial investment cycle.
Importantly, this cycle is now feeding directly into index-level earnings expectations. AI-related investment is expected to contribute meaningfully to S&P 500 EPS growth over the next two years, reinforcing why markets remain anchored to this theme despite macro uncertainty. AI is reshaping corporate behaviour. Companies are increasingly reallocating resources toward capex, in some cases reducing labour costs to preserve investment intensity. The market is rewarding credible AI beneficiaries while penalising weaker models or narrative-driven pivots, reinforcing dispersion beneath headline index strength.
Macro inputs were supportive but secondary. Strong retail sales, resilient PMIs, and stable labour-market data reinforced the soft-landing narrative, though sentiment remains weak. Policy developments around Kevin Warsh drew attention but had a limited immediate impact. Geographically, the equity landscape remains clearly hierarchical. The U.S. continues to act as the anchor, supported by stronger earnings, dominant exposure to AI, and lower sensitivity to energy shocks as a net energy producer. Asia is participating selectively through semiconductor supply chains, while Europe remains more exposed to energy costs and weaker growth dynamics, reinforcing the performance gap between regions.
Overall, equities remain supported by strong earnings and a structurally powerful AI capex cycle, but the market is becoming increasingly dependent on a narrow set of drivers. The key tension is now more visible: equity markets are pricing long-duration AI-driven earnings growth, while parts of the real economy are already absorbing higher energy and input costs. As long as that gap holds, the current regime can persist, but it leaves the market more sensitive to any disruption in earnings, capex, or energy stability.