Macro
The macro narrative shifted back toward inflation and geopolitics. Renewed US strikes against Iran and disruptions to shipping through the Strait of Hormuz pushed oil prices, inflation expectations and global yields higher, while reducing confidence in the disinflation path that had emerged during Q2.
The June FOMC minutes showed a divided committee, with some officials willing to consider further tightening if inflation fails to moderate. Subsequent Fed commentary remained focused on inflation risks and the limits of forward guidance. The rise in oil prices and inflation expectations reinforced the market’s shift toward a “higher for longer” regime. Two-year Treasury yields rose toward 4.17%, the highest level of the year, while markets reduced expectations for Fed easing.
Inflation risks broadened beyond energy. Higher crude prices feed into gasoline, freight, airfares, petrochemicals and inflation expectations at a time when services inflation remains sticky. Fed officials increasingly highlighted AI-related demand as a source of inflationary pressure, driven by data-centre construction, power demand, semiconductor and specialised equipment demand, and labour constraints.
The labour market weakened but remained far from recessionary. June payrolls increased by 57K, unemployment fell to 4.19%, initial claims declined to 215K, and continuing claims rose to 1.814M. The data reduced the urgency for further Fed easing while leaving inflation as the primary policy concern.
Activity indicators remained consistent with moderate expansion. ISM Services printed 54.0, Employment improved to 51.2 from 47.9, and S&P Global Services PMI came in at 51.2. Prices Paid eased to 67.7 from 71.3 but remained elevated.
Oil finished the week materially higher despite a late retracement. Brent rose roughly 5.5% to $76/bbl, and WTI gained almost 4% to $71/bbl. The market focus shifted from physical supply disruption alone to higher freight, insurance and security costs associated with Hormuz traffic. While geopolitical uncertainty increased materially, markets continued to assign a relatively low probability to a return to a broader regional conflict.
European yields moved higher alongside Treasuries as markets reassessed inflation risks. Europe remains more exposed to imported energy inflation and weaker underlying growth than the US. Core euro-area inflation is expected to remain near 2.4% through end-2026, keeping another ECB hike in play.
Germany provided a positive signal, with manufacturing orders rising 1.9% MoM in May and the three-month measure excluding large orders up 4.1%, although broader business sentiment remains weak.
China remained the principal global disinflationary force. June CPI and core inflation slowed more than expected, highlighting weak domestic demand and limited pricing power. The IMF nevertheless raised its 2026 China growth forecast to 4.6%, supported by exports and high-tech manufacturing.
Policy divergence continued across Asia. The RBNZ raised rates by 25 bp to 2.50%, its first increase in three years, while the Bank of Korea maintained a hawkish bias. Malaysia left rates unchanged at 2.75%.
Inflation trends across Latin America diverged. Mexico’s CPI slowed to 3.37% YoY and Brazil’s to 4.64%, supporting further easing. Colombian inflation accelerated to 6.14%, while Chilean inflation rose to 4.3%, increasing tightening risks.
The IMF lowered its 2026 global growth forecast to 3.0% and raised its 2027 forecast to 3.4%. Global inflation forecasts were revised higher, reflecting energy and food costs. AI investment continues to offset part of the drag from higher energy prices and geopolitical uncertainty.
The dominant macro regime shifted from growth concerns back toward inflation and supply-side risk. The US economy remains resilient, labour conditions remain broadly stable, and services activity continues to expand. At the same time, Hormuz-related energy risk, sticky services inflation, and AI-driven capacity constraints have reduced the Fed’s room to ease and increased the probability that policy will remain restrictive for longer than markets had expected.
Rates
Treasuries sold off for a second consecutive week, with yields rising 8–10bp across the curve (2Y +10bp to 4.21%, 10Y +9bp to 4.56%, 30Y +8bp to 5.06%) as markets digested renewed Middle East tensions, higher oil prices, and a hawkish set of June FOMC minutes. The move marked a continuation of July’s yield backup, with the curve bear-steepening as both real yields and inflation expectations moved higher.
The key driver was a renewed inflation narrative. June FOMC minutes revealed that a “few” officials saw a case for raising rates at the June meeting, while policymakers highlighted elevated risks that inflation could become embedded in expectations. Inflation concerns extended beyond tariffs and energy, with the Fed notably discussing AI-related demand as a potential source of inflation pressure, reflecting growing concerns that hyperscaler investment, power demand, and broader AI infrastructure spending may increasingly influence the macro outlook.
Geopolitics added to the pressure. Escalating US-Iran tensions pushed WTI crude up 4.3%, marking its first weekly gain in four weeks and reigniting concerns that higher energy prices could spill over into transportation, insurance, travel, and broader services inflation. Markets increasingly focused on persistent “supercore” inflation measures, while front-end rate pricing moved modestly toward a more hawkish stance, with roughly 34 bp of additional tightening priced by year-end.
Supply remained another headwind. Markets absorbed $119bn of Treasury issuance alongside heavy investment-grade corporate supply, including large deals from hyperscalers and other high-grade issuers. Growing fiscal deficits, persistent funding needs, and expanding corporate issuance continued to pressure long-end yields higher. However, demand remained robust: 3Y, 10Y and 30Y auctions all stopped through expectations, while the 30Y auction attracted near-record indirect participation (77.7%), suggesting real-money investors continue to view long-end yields above 5% as attractive entry points despite the hawkish backdrop.
The broader takeaway is that bond markets are increasingly balancing cyclical inflation risks against structural concerns around deficits, issuance, and supply absorption. While auction demand remains healthy, investors are demanding greater compensation to absorb both Treasury and corporate issuance, contributing to a gradual steepening bias and reinforcing the “higher-for-longer” rates narrative.
Outside of rates, the dollar edged higher (DXY +0.1%), supported by gains against the yen and euro. Gold fell 0.3%, while Bitcoin rose 4.1%. The re-coupling of oil prices, inflation expectations, and Treasury yields emerged as one of the week’s most important market themes and remains a key risk to monitor heading into CPI, retail sales, and upcoming Fed communication.
Credit
Credit markets navigated another week of heavy supply, higher Treasury yields, and renewed geopolitical uncertainty with remarkably little disruption. US IG spreads tightened 1bp to 74bp, while HY spreads compressed 12bp to 267bp, leaving both markets near cycle tights and continuing to reflect a benign view of both macro and credit fundamentals.
The more interesting development was beneath the surface. While cash HY spreads tightened meaningfully, CDX HY widened 5.5bp during the week, suggesting investors were more willing to add index protection than cash sellers were willing to emerge. The divergence likely reflects a combination of limited new HY supply, strong demand for carry, and growing caution around the broader macro backdrop. In IG, spreads remained largely rangebound, though rising Treasury yields pushed weekly total returns into negative territory despite modest spread tightening. HY’s shorter duration profile again proved advantageous, allowing the asset class to post positive returns for the week.
Primary markets remained exceptionally active. US IG issuance exceeded $50bn for the week, led by Amazon’s $25bn multi-tranche transaction, with demand comfortably absorbing supply. At the same time, investors are increasingly focused on the longer-term financing implications of the AI investment cycle. Hyperscaler balance sheets remain strong, but debt-funded capex is becoming a more important component of the credit story as infrastructure spending accelerates.
Outside the US, European credit remained constructive. IG spreads have largely retraced back to year-end levels, while HY performance continues to be led by BB-rated issuers. Single-B credits remain noticeably wider relative to higher-quality peers and represent one of the more obvious areas for spread convergence should risk appetite remain intact. Asian IG spreads finished the week little changed despite periodic widening linked to developments in the Middle East.
Fundamentals continue to send a mixed but generally supportive signal. Harley-Davidson was downgraded to high yield during the week, while several private-credit and leveraged-finance situations highlighted growing dispersion beneath the surface. At the broader market level, however, rating momentum continues to improve, with Fitch reporting upgrades outpaced downgrades globally for the first time in six quarters.
The broader takeaway remains unchanged. Credit continues to benefit from supportive technicals, limited near-term refinancing pressure, and a still-resilient macro backdrop. However, with spreads and volatility both hovering near historic lows, markets appear increasingly reliant on favourable outcomes. That does not necessarily imply an imminent correction, but it does leave little room for disappointment in inflation, growth, geopolitics, or the AI investment cycle, which has become an increasingly important driver of both issuance and index composition.
Equities
US equities were mixed this week, with performance increasingly concentrated in large-cap technology and AI beneficiaries. The S&P 500 (+1.23%) and Nasdaq (+1.74%) posted gains for the fourth time in five weeks, while the Dow (-0.50%) and Russell 2000 (-0.61%) lagged. Market breadth weakened notably, with S&P decliners outnumbering advancers and the equal-weight S&P 500 (RSP -0.3%) underperforming after briefly reaching a new all-time high early in the week.
Sector performance was highly bifurcated, with Technology (+3.41%), Energy (+3.22%) and Communication Services (+2.29%) leading the market, while Materials (-2.22%), Healthcare (-1.85%), Consumer Staples (-1.27%) and Industrials (-1.11%) lagged. Utilities (-0.83%) and Real Estate (-0.36%) also underperformed, while Financials (+0.06%) and Consumer Discretionary (+0.40%) finished little changed.
The dominant theme remained AI infrastructure spending. Several developments reinforced confidence that hyperscaler capex remains in the early stages of a multi-year expansion cycle. Meta (+14.8%) announced plans to significantly increase computing capacity, with Mark Zuckerberg stating that the company needs “all the compute it can get.” Micron raised its long-term capital expenditure plans from $200bn to $250bn through 2035 to accelerate US semiconductor manufacturing, while Anthropic signed a 20-year data-centre lease agreement. These announcements helped stabilise sentiment toward AI-linked infrastructure after the recent pullback.
Semiconductors recovered, with the SOX index gaining 2.7% after two consecutive weekly declines. Nvidia (+8.3%) benefited from reports that China will permit limited purchases of H200 chips despite ongoing export restrictions, offsetting concerns that its next-generation AI rack systems may be delayed until 2028. Broadcom (+11.0%) reached a new multi-year agreement with Apple (+2.2%) to design and manufacture custom components in the US, further highlighting the strategic importance of semiconductor supply chains.
The week’s performance also suggested that the recent correction in AI and momentum names was driven more by positioning and seasonal factors than by deteriorating fundamentals. However, the much-discussed broadening of market leadership stalled as rising oil prices and higher bond yields favoured growth over cyclical and domestically oriented sectors. Banks continued to outperform ahead of earnings season, while machinery, restaurants, retail, homebuilders and consumer-oriented businesses generally lagged. Market internals softened, with the percentage of S&P 500 constituents trading above their 50-day moving average declining from recent highs.
Economic data remained supportive but offered few catalysts. ISM Services was broadly in line with expectations and continued to indicate resilient economic activity, despite some moderation in new orders and business activity. Existing home sales declined more than expected, reflecting ongoing affordability constraints from elevated mortgage rates, while both initial and continuing jobless claims remained stable, reinforcing the view of a labour market that is cooling gradually rather than deteriorating.
Outside of technology, company-specific developments drove performance. Walmart (+1.8%) announced price reductions across thousands of products as consumers remain price sensitive. Costco (-3.7%) fell after June comparable sales fell short of elevated expectations. PepsiCo (-4.7%) reported solid international performance but continued weakness in North America, highlighting persistent consumer pressure. Delta (-5.8%) restored guidance and pointed to improving demand trends, although investors remained cautious on passenger yields and revenue growth. Ford (+4.8%) signed a long-term strategic agreement with Micron, while reports emerged that a banking consortium may be evaluating a potential acquisition of Fiserv (-3.6%).
Overall, the week reinforced a familiar pattern: AI-related investment remains the primary driver of equity leadership, while broader participation continues to struggle against the backdrop of higher rates, higher energy prices and tightening financial conditions. The key question heading into earnings season is whether corporate results can justify increasingly concentrated market leadership or whether broader economic resilience begins to support a more balanced advance.