Macro
The dominant macro development this week was a significant reassessment of the US growth and policy outlook. Nonfarm payrolls increased by 172K in May versus expectations near 90K, while upward revisions pushed average job creation over the past three months to roughly 188K per month, the strongest stretch in more than two years. Hiring broadened across manufacturing, construction, restaurants and government, while ISM Manufacturing rose to 54.0, its highest level since 2022. Factory orders increased 4.8%, durable goods orders rose 8.0%, and JOLTS openings climbed to 7.62M, the highest level since 2024. Together with accelerating AI-related investment and data-centre construction spending exceeding $50B annualised for the first time, the data suggest parts of the US economy may be reaccelerating despite elevated interest rates and geopolitical uncertainty.
The labour market remains more nuanced than the headline payroll number suggests. The unemployment rate held steady at 4.3% despite stronger hiring, challenging the view that the economy now requires only modest job growth to remain in equilibrium following last year’s immigration slowdown. Stronger hiring, stable unemployment and subdued wage growth suggest labour supply may be expanding alongside labour demand, implying greater economic capacity than previously assumed and limiting wage-driven inflation pressures. However, the Fed’s Beige Book highlighted growing strain among lower-income households, while NFIB survey data showed small-business hiring intentions falling to their lowest level since 2020. The economy remains in a low-hire, low-fire environment, but recent data suggest growth remains considerably more resilient than consensus expected only a few months ago.
The stronger data triggered a notable shift in market expectations. Investors increasingly questioned the assumption that the next Fed move will be a rate cut and began pricing a meaningful probability that policy rates may ultimately move higher if inflation remains elevated and growth continues to outperform expectations. Earlier in the year, markets were focused on recession risk and policy easing. The debate is now increasingly centred on whether resilient demand, elevated energy prices and sustained AI-related capex can keep inflation above target for longer and force central banks to maintain restrictive policy settings well into 2027. This shift extends beyond the US. Eurozone inflation accelerated to 3.2%, while inflation pressures remained elevated across several emerging markets exposed to higher energy costs. The risk is increasingly one of sticky inflation rather than collapsing demand.
The OECD lowered its 2026 global growth forecast to 2.8% from 2.9%, while maintaining its 2027 forecast at 3.1%. The US is still expected to outperform major developed economies, with 2026 growth of 2.0% versus 0.8% in the Eurozone and 0.6% in Japan. Global trade growth is projected to slow from 5.0% in 2025 to 3.1% in 2026, while public debt across advanced economies is expected to reach a record 113% of GDP next year. The OECD warned that prolonged disruption to Middle East energy flows could generate both materially weaker growth and significantly higher inflation than currently forecast.
Three months into the Iran conflict, vessel traffic through the Strait of Hormuz remains more than 90% below normal levels. Yet the global economy has proven far more resilient than initially feared because adjustment has occurred primarily through prices rather than physical shortages. Crude oil remains roughly 50% above pre-conflict levels, while chemicals, helium and sulfur products have experienced even larger price increases. Demand destruction, rather than widespread supply shortages, has absorbed most of the shock so far.
The larger risk increasingly lies outside oil. While Middle Eastern non-oil commodity production represents a small share of global output, certain chemicals and industrial inputs remain difficult to substitute. Even so, firms have successfully reallocated scarce inputs toward higher-value uses, substitution effects have emerged across supply chains, and price-driven demand adjustments have reduced pressure on inventories. Current estimates suggest non-oil supply disruptions could reduce global GDP by roughly 0.4-0.5%, with the largest impacts concentrated in energy-importing economies such as Türkiye and India, while the direct impact on the US and most developed markets remains modest.
Outside the US, conditions remain considerably weaker. Eurozone growth was revised down to 0.3% YoY in Q1, retail sales contracted 0.4% in April, and inflation accelerated to 3.2%, creating an increasingly difficult trade-off between weak growth and rising prices. Germany, Italy and France all reported soft consumer or industrial activity. India continues to face pressure from higher energy costs, weaker remittances and reduced foreign capital inflows, while China remains reluctant to deploy large-scale stimulus despite slowing external demand. Recent PMI data continue to show a widening gap between resilient US activity and weaker conditions across much of Europe and parts of the emerging world.
Recent data continue to support the resilience narrative. Industrial production indicators have yet to show evidence of widespread supply shortages, while prices for several supply-constrained products have retraced from recent peaks. The WTO Trade Barometer remains above 100, indicating global trade volumes continue to grow faster than their long-run average despite disruptions in the Middle East. Strong semiconductor demand, AI-related investment and accelerating exports from major technology producers such as South Korea, Taiwan, China and Japan continue to offset weakness elsewhere. AI investment is increasingly acting as a counterweight to geopolitical headwinds.
Geopolitics nevertheless remains the dominant medium-term macro risk. The conflict between the US, Israel and Iran continues to reshape global trade flows, energy markets and regional power dynamics. While alternative supply routes and increased production outside the Gulf have cushioned the immediate shock, elevated energy prices, geopolitical fragmentation, persistent supply chain uncertainty, and rising fiscal burdens remain meaningful headwinds to global growth heading into the second half of 2026.
Rates
Treasury markets experienced their largest selloff in nearly three months as investors continued to reprice the Federal Reserve path away from easing and toward the possibility of renewed tightening. Stronger-than-expected labour market data, resilient economic activity and elevated energy prices reinforced concerns that inflation may remain above target for longer. The 10Y Treasury yield rose to 4.54%, the 30Y moved back above 5.0%, and the curve bear-flattened sharply, with the 5s30s spread compressing to 74 bp, its flattest level since April 2025.
The week’s defining event was the labour market. Consensus expected roughly 85K-95K new jobs and an unemployment rate of 4.3%. While hiring continues to slow from prior years, labour market conditions remain sufficiently resilient to prevent the Fed from shifting its focus away from inflation. Importantly, hiring remains concentrated in healthcare and professional services rather than broad-based across the economy, suggesting a labour market that is stable rather than accelerating. Wage growth remains contained, but employment data continue to challenge the case for near-term policy easing.
As a result, markets significantly repriced Fed expectations. By week-end, Fed-dated OIS was fully pricing a 25 bp rate hike by December, with approximately 60% odds assigned to an October move. The discussion has shifted materially from when the next cut arrives to whether the next move could be a hike. Some strategists warned that investors may be underestimating the risk of a broader tightening cycle, noting that central banks rarely stop after a single hike when inflation pressures remain persistent.
Street forecasts moved decisively in a hawkish direction. BNP Paribas now expects three Fed hikes beginning in December, while Goldman Sachs removed its remaining 2026 rate-cut forecast and pushed expected easing into 2027. JPMorgan raised its Treasury yield forecasts, increasing its year-end target for the 10Y yield to 4.70% and recommending short Treasuries versus Bunds as a preferred relative-value trade. Citigroup remains one of the few major institutions still forecasting three rate cuts in 2026, highlighting the growing divergence of views across the market.
The incoming leadership transition at the Federal Reserve remains an important secondary theme. Investors expect Chair Kevin Warsh to place less emphasis on forward guidance and potentially reduce reliance on tools such as the dot plot. However, markets increasingly view policy outcomes as driven by incoming inflation and labour market data rather than by Fed communication. The prospect of more dissenting voices within the FOMC could contribute to greater volatility in interest rates over time.
Positioning across fixed income continued to turn more defensive. Amundi downgraded its duration view, citing expensive front-end valuations and fiscal risks at the long end. HSBC favoured the belly of the Treasury curve, while several managers preferred inflation-linked securities over nominal duration. PIMCO argued that the recent rise in long-end yields is primarily a function of shifting Fed expectations rather than AI-related debt issuance or a structural rise in term premium. Across markets, the dominant strategy recommendation increasingly favours relative-value opportunities rather than outright duration exposure.
Investor demand for cash-like instruments remained exceptionally strong. Assets in U.S. money-market funds reached a record $8.29T as investors continued to favour attractive short-term yields while avoiding duration risk and volatility. Fixed-income flows remained broadly supportive, with continued inflows into short-duration and inflation-protected bond funds, while money-market assets increased by a further $22B during the week. The persistence of these flows highlights the challenge facing longer-duration assets as Treasury issuance remains elevated and inflation uncertainty persists.
Globally, relative-value opportunities became increasingly important. Bunds continued to outperform Treasuries, supported by expectations that the ECB tightening cycle will remain shallower than the Fed’s. In Japan, stronger wage growth and growing expectations for further BOJ tightening pushed JGB yields higher, although demand at recent auctions remained solid. Across developed markets, investors increasingly favour curve and cross-market positioning over outright directional duration bets.
An additional feature of the week was continued compression in Treasury term premium. Despite elevated geopolitical uncertainty, long-end yields remained relatively contained relative to the front end as investors grew more comfortable that the conflict would not trigger a sustained inflation shock. The result was further curve flattening, with much of the week’s adjustment occurring through policy-rate expectations rather than a rise in long-term inflation risk premia. At the same time, fixed-income flows remained supportive, with continued demand for short-duration and inflation-protected products and money-market assets increasing by a further $22B. Supply will also remain in focus next week as the Treasury auctions $119B across 3Y, 10Y and 30Y maturities, providing an important test of demand following the recent repricing higher in yields.
Looking ahead, the June CPI release represents the next major catalyst for global bond markets. Following the sharp repricing in rates this week, inflation data will determine whether markets continue moving toward a tightening narrative or whether expectations for higher policy rates begin to stabilise. With no Fed speakers scheduled due to the pre-FOMC blackout period, market attention will remain firmly focused on inflation data, Treasury auctions and energy prices. For now, the rates market remains focused on inflation, policy repricing and the risk that resilient economic activity delays any prospect of monetary easing.
Credit
Credit markets entered the week with spreads near cycle tights and exceptionally strong technicals, but finished under pressure after a stronger-than-expected May payrolls report triggered a repricing of Fed expectations and produced the largest single-day widening in investment-grade CDS since late March. Despite the late-week selloff, spreads remain near historically tight levels and issuance demand continues to absorb record supply.
Investment-grade spreads widened 1 bp during the week to 73 bp, while the Bloomberg US IG Index returned -0.59%. High-yield spreads widened 8 bp to 262 bp and returned -0.42%, with transport the weakest-performing sector. CCC spreads briefly widened to 772 bp before partially retracing. The move reflected higher Treasury yields rather than deteriorating fundamentals, reinforcing the market’s continued sensitivity to rates rather than credit risk.
Primary markets remained exceptionally strong. U.S. investment-grade issuance surpassed $1T YTD at the fastest pace since 2020, with $47.5B priced during the week from 36 issuers. Order books remained heavily oversubscribed despite historically tight spreads. Hubbell’s $1.9B acquisition financing attracted more than $10B in demand, while average new-issue concessions remained minimal at roughly 2 bp.
AI infrastructure continues to dominate credit markets. CoreWeave-linked data-centre financing raised $900M in the high-yield market at a 7.5% yield, while an Nvidia-linked data-centre financing from Hut 8 raised $4.25B and attracted approximately $17B of orders. Bloomberg estimates AI-related issuers have already raised more than $27B this year, while market participants estimate AI now accounts for roughly 20% of U.S. high-yield issuance and 12% of investment-grade issuance. Apollo and Blackstone also finalised a $35B financing package for Anthropic, underscoring the scale of capital being directed toward AI infrastructure.
Private credit remained the primary area of concern. Blackstone’s BCRED faced repurchase requests equivalent to roughly 10% of shares outstanding and again enforced its 5% quarterly redemption cap, while Monroe Capital limited withdrawals for the first time after investors requested redemptions equal to 9% of shares. In contrast, Fidelity’s private credit fund met all redemption requests and continued to report positive inflows. The divergence highlights increasing bifurcation within the asset class, with larger platforms continuing to attract capital while smaller and mid-tier vehicles face growing liquidity pressures.
At the same time, private lenders are becoming more defensive. Managers have begun raising spreads and fees, reducing leverage and tightening documentation standards on new transactions. Nevertheless, large managers continue to report healthy portfolio fundamentals. Ares noted that its roughly 3,000 portfolio companies continue to grow revenues by 8-12% annually, with few signs of distress, while Crescent Capital closed its largest-ever direct lending fund with $5.5B in equity commitments ($10.8B in investable capital).
Overall, credit fundamentals remain supportive, and demand remains exceptionally strong, particularly for AI-linked issuers. However, with IG spreads near 73 bp and HY spreads near post-2007 tights, valuation support has become increasingly limited. The combination of record issuance, tightening lending standards and rising redemption pressure in private credit suggests investors are becoming more selective even as the broader credit cycle remains constructive.
Equities
U.S. equities pulled back after an extended rally, with the S&P 500 declining 2.59%, the Nasdaq falling 4.68%, the Dow losing 0.32%, and the Russell 2000 down 2.94%. The S&P 500 snapped a nine-week winning streak after reaching a fresh record high on 2 June, while the equal-weight S&P 500 declined only 0.5%, highlighting that weakness was concentrated in large-cap growth and AI-related names rather than the broader market. The selloff reflected a repricing of interest-rate expectations following stronger-than-expected economic data, with investors increasingly viewing the Fed as a potential policy tightener rather than an imminent source of easing.
Performance beneath the surface revealed a sharp rotation away from growth and toward defensive and cyclical sectors. Energy (+2.46%), healthcare (+2.31%), real estate (+1.52%), financials (+1.31%), consumer staples (+0.95%), materials (+1.24%) and industrials (+0.58%) outperformed, while consumer discretionary (-6.20%), technology (-5.42%) and communication services (-3.91%) lagged. Semiconductors paused after a historic run, with SOX falling 4.7%, while software underperformed with IGV down 5.7%. Airlines, restaurants, credit cards, exchanges, chemicals, retail-investor favourites and most-shorted names were among the weakest groups, while managed care, pharmaceuticals, machinery, railroads, large-cap banks and investment banks outperformed. Global equity funds recorded net outflows of $7B versus inflows of $2B the prior week, although U.S. funds continued to attract capital while Europe, Japan and China saw redemptions. Sector flows showed energy outflows and industrial inflows, reinforcing the rotation toward infrastructure and capex beneficiaries.
The week’s key catalyst was the May employment report. Nonfarm payrolls exceeded expectations and prior months were revised higher, lifting the three-month average to its highest level since March 2024. Combined with stronger JOLTS, ADP and ISM data, the release reinforced the narrative of a resilient economy. Markets sharply reduced expectations for policy easing after comments from Fed officials suggesting rates may need to remain restrictive, with higher yields weighing directly on long-duration growth assets and triggering Friday’s AI-led selloff.
The AI trade experienced its most significant test in months. Broadcom (-13.7%) became the focal point after reiterating FY27 AI revenue targets that failed to satisfy elevated expectations. Concerns centred on deployment timing, a back-end-loaded revenue ramp and competitive pressures within custom silicon. Credo (-12.4%) and Ciena (-15.9%) also sold off despite solid fundamentals, highlighting increasingly stretched positioning and expectations. The selloff sparked renewed debate around the durability of AI-driven earnings upgrades, profit-taking after an extraordinary run and the seasonal slowdown in corporate buybacks.
Importantly, the underlying AI capex narrative remains intact. More than 80% of surveyed respondents expect AI server spending to increase further in 2026, while Computex announcements, Nvidia’s AI PC strategy and xAI’s planned training and inference expansion reinforced expectations that AI infrastructure investment remains in the early stages of a multi-year cycle.
A growing institutional debate is whether the AI buildout is transitioning from an earnings story into a financing story. Alphabet’s reported plan to raise up to $80B of equity to help fund a $180-190B AI infrastructure programme was viewed as an important signal. While modest relative to Alphabet’s roughly $4.5T market capitalization, the raise is comparable to the expected proceeds from some of the largest anticipated IPOs, including SpaceX, OpenAI and Anthropic. The move suggests that even the largest hyperscalers may increasingly access external capital markets to fund AI expansion, prompting some strategists to rotate from AI infrastructure beneficiaries toward companies positioned to monetise AI adoption.
The timing is notable given a rapidly strengthening issuance pipeline. IPO activity has already reached its strongest start since 2021, with 40 deals raising $28B year-to-date. Several Wall Street forecasts point to roughly $225B of IPO issuance in 2026 and total corporate equity supply approaching $675B when follow-on offerings are included. Lock-up expirations could create additional supply as newly listed companies expand their public floats. At the same time, buyback growth has slowed to just 4% year-on-year as AI capex accelerates, while the S&P 500 buyback yield has fallen to 1.9%, near the lowest level since 2021. Although issuance still represents only 1.0% of U.S. market capitalisation versus a long-term average of 1.5%, investors are increasingly focused on whether simultaneous hyperscaler equity raises and mega-cap AI IPOs could create supply pressures.
Several factors should help absorb that supply. South Korean investors continued directing semiconductor-driven trade surpluses into U.S. equities, supporting technology shares. Global M&A activity also remains robust, with several investment banks forecasting approximately 18% growth in deal volumes over the next 12 months as corporates simplify portfolios, dispose of non-core assets and reallocate capital toward AI and other strategic priorities. Combined with ongoing buybacks, household demand and foreign inflows, these flows should help offset rising issuance, although equity supply-demand dynamics are likely to become a more important theme through 2027.
Earnings results remained mixed but generally constructive. Victoria’s Secret (+35.6%), Hewlett Packard Enterprise (+14.3%) and Medtronic (+10.7%) all exceeded expectations, while Ollie’s Bargain Outlet (-6.0%), Ulta Beauty (-8.2%), Five Below (-16.2%) and Netskope (-20.6%) highlighted concerns around consumer spending, margins and software growth. Broadcom’s decline despite strong results reinforced the market’s increasingly unforgiving stance toward companies failing to exceed elevated expectations.
Outside earnings, Marvell Technology surged 28.5% after Jensen Huang described the company as a potential future trillion-dollar business. Investors also focused on the approaching wave of large IPOs, including the anticipated ~$75B SpaceX offering, while monitoring whether resilient growth, inflation risks and tariffs could keep monetary policy restrictive and challenge the high-multiple growth stocks that have driven much of this year’s gains.
Market leadership remains increasingly concentrated. FactSet data shows S&P 500 forward 12-month EPS estimates have risen 10.3% since the start of 2026, while forward sales-per-share estimates have increased 4.7%, resulting in approximately 70 bp of forward margin expansion. More than 70% of the increase in 2026 S&P 500 earnings estimates has come from just six companies: Nvidia, Micron, Broadcom, SanDisk, Exxon and Chevron. Importantly, much of the Energy sector’s earnings upgrade reflects higher oil prices linked to the Iran conflict, leaving semiconductors as the dominant source of structural earnings growth. Semiconductors now represent nearly 14% of total U.S. equity market capitalization, meaning an increasing share of both index performance and earnings growth is being driven by a single industry. The secular AI opportunity remains substantial, but the combination of concentrated earnings revisions, elevated valuations, rising capital requirements and a growing equity issuance pipeline leaves the market increasingly dependent on continued execution across a relatively small group of AI-linked companies.