The dominant macro theme remained the US-Iran conflict and the continued closure of the Strait of Hormuz, as markets increasingly abandoned the view that the disruption was temporary. After more than 80 days of disruption, investors have begun shifting from a “headline risk” framework toward a “persistent supply shock” framework<\/strong>. Brent crude traded around $110, and WTI around $106-108 during the week, as concerns grew that strategic reserves, commercial inventories, and alternative supply routes are only delaying the adjustment process rather than resolving it. The key macro question is no longer whether the shock is inflationary, but how long inventories can continue absorbing the loss of supply before higher prices are required to ration demand<\/strong>.<\/p>\n\n\n\n This created the central macro tension of the week. Oil continued to push inflation and inflation expectations higher, while growth outside AI-related investment showed few signs of acceleration. The result is an increasingly uncomfortable stagflation setup characterised by higher prices, weaker real incomes, softer global growth and central banks with limited room to ease policy. The IMF warned that the conflict is disrupting commodity markets, tightening financial conditions and increasing downside risks to global growth<\/strong>, while several economists noted that every additional month of disruption raises the probability of broader economic damage.<\/p>\n\n\n\n Inflation remained the dominant policy concern. Markets entered the following week expecting headline PCE inflation of 3.8% y\/y, while survey data pointed to a significant acceleration in pipeline price pressures. The S&P Global manufacturing prices-paid index rose to its highest level since June 2022, while services pricing reached its strongest reading since July 2025. Importantly, the inflation story has broadened well beyond crude oil. Gasoline, diesel, jet fuel, freight costs and refining constraints increasingly became part of the macro discussion. Several analysts argued that if Hormuz remains closed through the summer, the adjustment mechanism will shift from inventory drawdowns to outright demand destruction through materially higher fuel prices.<\/p>\n\n\n\n Consumer confidence deteriorated sharply as households adjusted to the prospect of persistently higher prices. The University of Michigan consumer sentiment index fell to a record low of 44.8, while one-year inflation expectations climbed to 4.8%<\/strong> and five-year expectations rose to 3.9%, both significantly above pre-war levels. The rise in long-term inflation expectations is particularly important because it challenges the Fed’s assumption that inflation expectations remain anchored. Consumer behaviour increasingly reflects the energy shock. Retailers reported a growing divergence between higher-income households, which continue to spend relatively freely, and lower-income consumers, who are becoming increasingly budget-conscious. One notable data point showed average gasoline purchases falling below 10 gallons per fill-up for the first time since 2022, suggesting households are already adapting their spending patterns to higher fuel costs. Travel demand remained resilient heading into summer, but rising airfares, higher fuel surcharges and evidence of planned spending cutbacks suggest energy inflation is increasingly filtering through the broader consumer economy.<\/p>\n\n\n\n The labour market remained stable on the surface but continued to cool beneath the headlines. Initial jobless claims fell to 209K, and continuing claims remained near 1.8M, reinforcing the emerging low-hire, low-fire environment. Job growth remains concentrated in healthcare, food services and social assistance, while employment in transportation, warehousing and government continues to soften. Policymakers appear increasingly concerned about hiring restraint rather than layoffs, with firms reportedly delaying recruitment due to economic uncertainty, higher costs and AI-related productivity initiatives. At the same time, demographic shifts have fundamentally altered labour-market dynamics. Slower population growth, lower immigration and an ageing workforce imply that payroll growth can remain modest<\/strong> without necessarily signalling recession. As a result, employment data continue to look weaker than historical norms while remaining broadly consistent with a stable unemployment rate.<\/p>\n\n\n\n The US economy continues to exhibit a “yes, but” profile. Q1 GDP growth was 1.6%, while Q2 tracking estimates remained substantially stronger, though much of that strength appears linked to inventory accumulation and stockpiling ahead of further price increases. Manufacturing PMI rose to a four-year high of 55.3, but much of the increase appears driven by front-running behaviour rather than underlying demand. Housing data delivered a similarly mixed message, with pending home sales improving while housing starts weakened under the pressure of higher mortgage rates and deteriorating affordability.<\/p>\n\n\n\n China remained the clearest weak-growth story globally<\/strong>. April data broadly disappointed, with retail sales significantly below expectations, fixed-asset investment remaining weak and property activity continuing to contract<\/strong>. The recovery remains highly uneven, with exports and AI-linked manufacturing performing relatively well while domestic demand remains subdued. Youth unemployment, weak household confidence and the unresolved property overhang continue to constrain growth, while policymakers appear reluctant to deliver a large-scale stimulus package absent a more severe deterioration. The weakness in China provides a partial offset to global inflation pressures but reinforces concerns about the durability of global growth outside the United States.<\/p>\n\n\n\n The Trump-Xi summit helped stabilise bilateral relations but delivered little in the way of a transformational breakthrough. Agricultural purchases and trade dialogue improved at the margins, while strategic tensions around Taiwan, semiconductors, rare earths, and supply chain security remained largely unresolved. The broader implication is that while immediate trade tensions have eased, the structural decoupling trend remains intact.<\/p>\n\n\n\n The principal offset to these stagflationary pressures remains AI<\/strong>. Data-centre construction, semiconductor demand, power infrastructure investment and broader AI-related capital expenditure continue to support growth, employment and corporate spending. Without AI-related investment, the macro backdrop would likely appear substantially weaker. At the same time, AI complicates the inflation outlook by increasing demand for energy, electricity, semiconductors and capital, creating a dynamic in which one of the economy’s strongest growth engines is also contributing to resource constraints.<\/p>\n\n\n\n The macro picture is therefore not a clean recession call. Growth remains positive, particularly in the United States, and AI continues to provide a powerful source of investment demand. However, markets are increasingly pricing a world characterised by higher energy costs, higher inflation expectations, higher bond yields and reduced scope for monetary easing. Oil is pushing inflation higher, China remains weak, lower-income consumers are coming under increasing pressure, and the bond market is demanding greater compensation for inflation, deficits and uncertainty. The result is an increasingly pronounced stagflation watch rather than an imminent recession: a world of tighter financial conditions, weaker real incomes and a progressively narrower set of growth drivers supporting the global economy.<\/p>\n\n\n\n <\/p>\n\n\n\n <\/p>\n\n\n\n <\/p>\n\n\n\n Rates became the market’s pressure point this week as investors reassessed inflation, Fed policy, fiscal sustainability and the clearing price for sovereign debt globally. The US 30Y Treasury yield touched 5.20%<\/strong>, its highest level since 2007, while the 10Y reached 4.69%, the highest since early 2025<\/strong>. Since the US-Iran conflict began on 1 March, the 30Y yield has risen as much as 50.1 bps and remains 29.3 bps above pre-conflict levels, while the 10Y has climbed from roughly 3.95% to 4.60%, a 65 bp increase in approximately 75 days<\/strong>. The move pushed decisively through the widely watched 5% threshold on the long bond, a level many investors had expected to attract meaningful demand. Instead, the market continued selling duration, raising questions about the yield required to clear the $31T Treasury market.<\/p>\n\n\n\n The selloff was global. Long-end yields rose across the US, Japan and the UK<\/strong> as investors demanded greater compensation for inflation risk, fiscal deficits and debt supply. Since the conflict began, crude oil has risen roughly 50% and briefly traded above $100, forcing markets to confront the possibility that war-driven inflation could derail the soft-landing narrative. Yet the more important development was that yields continued rising even as oil stabilised<\/strong> and later retreated, suggesting markets were increasingly repricing term premia and fiscal risk<\/strong> rather than simply reacting to energy prices. Primary dealers project a US budget deficit of roughly $1.95T this fiscal year, widening toward $2T by 2027, while investors increasingly question whether expanding sovereign issuance can be absorbed without materially higher yields. Several market participants also noted that traditional reserve buyers have become less dominant<\/strong>, leaving a more price-sensitive marginal buyer of Treasuries.<\/p>\n\n\n\n The April FOMC minutes confirmed a more hawkish Committee than implied by recent policy statements. A majority indicated further policy firming could become appropriate if inflation remains persistently above 2%, while many participants favoured removing the Fed’s easing bias altogether. Officials cited risks from elevated energy prices, tariffs, and Middle East uncertainty, while also highlighting financial stability concerns regarding private credit, leveraged Treasury positions, and the broader market structure. Three regional Fed presidents objected to aspects of the April statement language, underscoring growing divisions within the Committee.<\/p>\n\n\n\n Fed rhetoric reinforced the shift. Governor Christopher Waller said the next move is now as likely to be a hike as a cut and refused to rule out additional tightening if inflation fails to moderate. Richmond Fed President Barkin warned that repeated supply shocks could weaken the inflation anchor, while Philadelphia Fed President Paulson said policy remains only mildly restrictive and that cuts require clearer evidence of sustained disinflation. Notably, even officials previously viewed as dovish adopted a more cautious tone.<\/p>\n\n\n\n The repricing of Fed expectations has been extraordinary. Before the conflict, markets were pricing roughly 2.5 Fed cuts. By the weekend, Fed funds futures implied more than 22 bp of tightening through year-end, FedWatch showed more than a 60% probability of a hike by October and money markets fully priced a hike by December. Bloomberg discussions described markets as having removed three expected cuts and added two hikes in little more than two months. The shift reflects growing concern that energy-driven inflation could become more persistent and that policymakers may need to prioritise inflation control over growth support.<\/p>\n\n\n\n The comparison with 2022 is increasingly striking. CPI currently stands near 3.8%, far below the 9% peak reached during the post-pandemic inflation shock, yet 10Y Treasury yields are trading around 4.6%, above the roughly 4.2% peak reached during that episode<\/strong>. The implication is that investors are demanding greater compensation not because inflation is higher, but because confidence in the policy framework is lower. For many bond investors, cutting rates in response to an energy-driven supply shock risks stimulating demand precisely when constrained supply requires adjustment.<\/p>\n\n\n\n Kevin Warsh was sworn in as Federal Reserve Chair on Friday, becoming the first Fed Chair since Alan Greenspan in 1987 to take the oath at the White House. He inherits a difficult backdrop: rising inflation expectations, a divided FOMC, an ongoing energy shock<\/strong> and markets pricing hikes rather than cuts. While some observers remain concerned about political pressure from the White House, others note that Warsh has historically been among the more hawkish candidates for the role, with a strong preference for monetary-policy orthodoxy and scepticism toward prolonged balance-sheet expansion.<\/p>\n\n\n\n The key debate is whether markets are confronting a broad inflation regime or merely a commodity-driven shock. The hawkish camp argues that higher energy prices risk becoming embedded in inflation expectations and require tighter policy. Others argue inflation remains concentrated in commodities rather than wages and broader services<\/strong>, suggesting the Fed should avoid overreacting to what may prove a temporary supply shock. That disagreement explains much of the volatility observed across rates markets during the week.<\/p>\n\n\n\n The broader regime debate remains unresolved. The old framework of falling inflation, imminent Fed cuts and range-bound long-term yields is being challenged by a new environment characterised by energy shocks, larger fiscal deficits, higher neutral-rate estimates, rising term premia and more price-sensitive Treasury demand. The front end of the curve is testing Fed credibility, while the long end is testing fiscal and inflation credibility<\/strong>. Warsh’s first task is not to deliver rate cuts, but to convince bond investors that the Fed will not fall behind the curve while avoiding a policy mistake by overreacting to an oil shock that has yet to become a broad wage-driven inflation cycle.<\/p>\n\n\n\n Across asset classes, the Dollar Index was little changed on the week, gold fell 0.8%, Bitcoin futures declined 3.7%, and WTI crude dropped 8.4% on optimism surrounding US-Iran diplomacy. Equities remained resilient despite the bond selloff, although the sustainability of valuations may increasingly come into question should long-end Treasury yields move decisively beyond 5.25%.<\/p>\n\n\n\n <\/p>\n\n\n\n Credit markets remained resilient<\/strong> despite higher Treasury yields, renewed discussions of Fed rate hikes, and elevated geopolitical risk. The defining theme was a widening divergence between strong public credit markets and increasingly fragile private markets. Spreads remained near cycle tights, issuance was readily absorbed, and institutional demand stayed robust<\/strong>, while concerns around private credit, private-equity exits and AI-related financing continued to build.<\/p>\n\n\n\n Demand for fixed income remained supported by attractive absolute yields rather than spread compensation<\/strong>. Investment-grade yields remained around 5.25% despite spreads trading near 25- 27-year tights<\/strong>. A survey of 300 global institutional investors showed nearly one-third intend to increase allocations to liquid fixed income over the next 12 months, up from roughly one-quarter a year ago, reflecting continued demand for income, diversification and downside protection. Investors increasingly viewed corporate balance sheets as easier to underwrite than sovereign balance sheets, given growing concerns around deficits, inflation and government borrowing requirements.<\/p>\n\n\n\n High yield continued to outperform expectations. More than 56% of the market is now rated BB, the highest-quality composition in the asset class’s history. Years of refinancing activity and restrained leverage growth have left balance sheets stable, helping explain why spreads remained resilient despite higher rates and fading expectations for policy easing. Investors remained constructive on BB and select single-B exposure, particularly in shorter-duration and floating-rate structures, while avoiding lower-quality segments where spread compensation remains limited.<\/p>\n\n\n\n Positioning remained cautious<\/strong> despite supportive fundamentals. Managers generally favoured investment-grade corporates, shorter maturities and diversified exposure<\/strong> over extending duration or moving down in quality. Credit curves remain relatively flat, providing limited compensation for long-dated risk at a time when fiscal deficits and term-premium pressures continue to weigh on longer-dated sovereign yields.<\/p>\n\n\n\n AI<\/strong> remained one of the largest financing themes. Technology companies are expected to spend roughly $780B on AI-related capex this year, helping drive more than $100B of US investment-grade issuance and another ~$50B internationally<\/strong>. Demand for these deals remained strong, but investors became increasingly selective. Concerns centred on potential data-centre overbuild, uncertain utilisation rates, depreciating infrastructure assets, and the asymmetry faced by bondholders, who bear downside risk without meaningfully participating in upside outcomes. Several managers argued AI remains a more attractive equity opportunity than a credit opportunity at current spread levels.<\/p>\n\n\n\n The most notable discussion of risk occurred in private markets. Fed officials reportedly discussed the possibility that losses in private-credit portfolios could contribute to a broader credit contraction, highlighting growing concerns about liquidity, valuation transparency, and refinancing risk. At the same time, private-equity activity remains exceptionally weak<\/strong>. THL’s Scott Sperling described deal activity as the lowest he has seen in 45 years, with assets acquired during 2020-2022 still struggling to clear today’s valuation environment, particularly within software. Slower exits continue to suppress sponsor activity, delay distributions and reduce leveraged-finance turnover.<\/p>\n\n\n\n Large-scale financing remains available, but capital demand is rising across the system. Bankers are reportedly preparing roughly $49B in debt financing for Paramount’s acquisition of Warner Bros. Discovery, while governments, municipalities, hyperscalers and infrastructure borrowers continue to compete for investor capital. For now, crowding-out pressures remain concentrated in sovereign markets, though persistent issuance could eventually challenge spread valuations if earnings momentum weakens.<\/p>\n\n\n\n Municipal issuance remained exceptionally strong. Municipalities have issued approximately $216B year-to-date, up roughly 10%<\/strong> from the same period last year, driven by airports, transit systems, water infrastructure and universities. Mega deals above $1B and super-mega deals above $2B are becoming increasingly common, including two New York transactions above $2B and one California transaction above $2.4B. Demand remains sufficient to absorb supply, although reaching the projected $600B issuance target would require roughly $50B of issuance per month for the remainder of 2026.<\/p>\n\n\n\n Sector-specific risks remain concentrated in energy-sensitive borrowers<\/strong>. Ryanair warned that European airline bankruptcies are possible if elevated oil prices and disruption in the Strait of Hormuz persist into September or October. The carrier is protected through fuel hedges covering 80% of consumption through March 2027 at $67\/barrel, versus spot jet fuel prices near $150\/barrel, but weaker competitors have already begun reducing capacity.<\/p>\n\n\n\n The credit market’s message remains clear: public credit is stable, private markets are being closely watched, and spreads continue to depend on strong earnings and open funding markets. The strongest areas remain high-quality investment-grade and upper-tier high-yield, while vulnerabilities are increasingly concentrated in private credit, sponsor-backed software assets, long-duration AI infrastructure financing and borrowers dependent on refinancing rather than internally generated cash flow.<\/p>\n\n\n\n <\/p>\n\n\n\n <\/p>\n\n\n\n U.S. equities moved higher during the week, with the Dow Jones +2.13%, Russell 2000 +2.72%, S&P 500 +0.88%, and Nasdaq +0.45%<\/strong>. The S&P 500 recorded its eighth consecutive weekly gain, while market breadth continued to improve<\/strong>, with the equal-weight S&P 500 outperforming the cap-weighted index by approximately 160 bps (RSP +2.5%).<\/p>\n\n\n\n The continued outperformance of equal-weight indices and small caps suggests participation has broadened beyond the largest technology names that have dominated market leadership for much of the year. Despite a challenging backdrop, equities remained resilient, with the Dow Jones reaching another record high and positioning indicators suggesting some investors remained underexposed to the rally. International markets also participated in the advance, led by Germany’s DAX (+3.92%), Euro Stoxx 50 (+3.29%), Nikkei 225 (+3.14%), and FTSE 100 (+2.66%),<\/strong> while Hong Kong’s Hang Seng (-1.37%) remained a notable laggard amid ongoing weakness in Chinese equities. South Korea remains one of the strongest equity markets globally. The AI-driven rally in Samsung Electronics and SK Hynix has been so powerful that Korean equities have now outperformed the S&P 500 over the past decade<\/strong> on a total-return basis, with nearly all of the relative outperformance generated during the last year as investors aggressively re-priced AI memory and semiconductor exposure.<\/p>\n\n\n\n Sector performance reflected a defensive bias beneath the surface of the rally. Health Care (+3.31%), Utilities (+3.30%), and Real Estate (+3.06%)<\/strong> were the strongest performers, followed by Consumer Discretionary (+1.92%), Financials (+1.57%), and Technology (+0.96%). Communication Services (-1.86%)<\/strong> was the weakest sector, while Consumer Staples (-0.97%)<\/strong>, Energy (-0.37%), Materials (+0.02%), and Industrials (+0.16%) lagged the broader market. At the industry level, leadership came from semiconductors and memory stocks (SOX +5.3%)<\/strong>, quantum computing, apparel retailers, homebuilders, banks, airlines, medical devices, and pharmaceutical companies, while energy, China technology, marine shipping, hospitals, managed care, exchanges, and waste-management names underperformed. Short-interest baskets also outperformed, highlighting improving risk appetite and continued investor willingness to add exposure to higher-beta segments of the market.<\/p>\n\n\n\n AI enthusiasm and consumer resilience remained the dominant themes driving equity markets. Investors continued to reward companies with direct exposure to AI infrastructure spending<\/strong>, while earnings results across retail, consumer, and housing sectors reinforced the view that underlying demand remains healthy. Big tech performance was mixed<\/strong>, with Apple (+2.9%) outperforming while Nvidia (-4.5%) lagged despite delivering another strong quarter, highlighting the increasingly demanding expectations embedded within the largest AI beneficiaries.<\/p>\n\n\n\n The week’s most important event was NVIDIA’s earnings<\/strong>, which once again reinforced the strength of the AI investment cycle. Revenue rose 85% YoY to $81.6B, Data Centre revenue accelerated 92% YoY to $75.2B, and management guided next-quarter revenue materially above expectations<\/strong>. The company reiterated confidence in its $1T Blackwell and Rubin AI infrastructure opportunity through 2027 while highlighting accelerating enterprise, sovereign AI, and cloud demand. Investors also focused on a newly disclosed $200B CPU opportunity, expanding Nvidia’s addressable market beyond GPUs. Bulls pointed to growing enterprise AI adoption, opportunities to gain CPU share, robotics, sovereign AI deployments, and improving visibility into long-duration infrastructure spending as additional growth drivers. Despite another beat-and-raise quarter, Nvidia declined 4.5% during the week, highlighting the increasingly demanding expectations embedded within the AI complex and the challenge of exceeding already elevated investor assumptions.<\/p>\n\n\n\n An increasingly important debate among investors is the growing contribution of AI-related investment gains to reported earnings<\/strong>. S&P 500 earnings are currently tracking approximately 27% YoY growth, with some analysts estimating that roughly one-third of that increase was driven by mark-to-market gains associated with investments in private AI companies, particularly Anthropic. Amazon, Microsoft, and Nvidia<\/strong> all hold meaningful exposure, and Anthropic’s valuation reportedly increased from roughly $380B during Q1 to approximately $900B in recent financing discussions. While these gains are largely non-cash, they flow through reported earnings and have become an increasingly important contributor to headline profit growth, helping explain why earnings have accelerated faster than many underlying economic indicators<\/strong> and why valuation multiples have remained more stable than expected.<\/p>\n\n\n\n Beyond Nvidia, earnings generally reinforced the narrative of consumer resilience<\/strong>. TJX (+7.4%), Home Depot (+5.2%), Toll Brothers (+6.4%), Cava (+4.6%), Workday (+2.5%), and Ross Stores (+10.4%) all delivered results that exceeded expectations, with Ross reporting record comparable sales growth and continued gains in the off-price retail channel. Homebuilders also remained a bright spot, while management commentary across multiple retailers suggested consumer spending trends remain stable. Target (+3.3%) also beat expectations and raised guidance, though investors questioned the modest size of the earnings upgrade given strong results. Earnings results continued to highlight a bifurcated consumer environment, with premium discretionary, travel, housing, and off-price retail categories generally outperforming while value-oriented and grocery-exposed businesses faced more competitive conditions. Walmart (-8.5%) underperformed following an in-line quarter and concerns about grocery-pricing competition<\/strong>, while Intuit (-18.6%) came under pressure amid questions about TurboTax growth and competitive dynamics. Deere (-5.8%) reported better-than-expected results but left full-year guidance unchanged, while Lowe’s (-1.6%) delivered slightly softer comparable sales despite stronger margins. Nevertheless, the aggregate earnings picture continued to support expectations for solid corporate profit growth through the remainder of the year.<\/p>\n\n\n\n Corporate developments outside earnings further reinforced investor enthusiasm around AI. Anthropic is projected to more than double revenue to approximately $10.9B in Q2 while reaching its first operating profit, and reports suggest OpenAI is preparing for a future IPO. IBM (+15.7%) surged after confirming a $1B CHIPS Act award<\/strong> to support a new quantum computing foundry, while AI infrastructure remained a major theme across compute, networking, power generation, and data-centre ecosystems. Investors also responded positively to infrastructure-related announcements, including partnerships focused on expanding power availability for AI workloads, reinforcing the view that the investment opportunity increasingly extends beyond chips into the broader AI ecosystem. Investor sentiment also became increasingly optimistic, with the average three-month put-to-call skew for S&P 500 constituents falling to 0.04, the fourth-lowest reading of the past two decades<\/strong> and below levels seen during the 2021 meme-stock frenzy. The measure has declined roughly 75% since March, reflecting sharply lower demand for downside protection and growing confidence in the earnings and AI spending outlook.<\/p>\n\n\n\n Market breadth continued to improve<\/strong>, with small-caps, equal-weight indices, and several cyclical industries outperforming the major benchmarks. AI infrastructure spending remains the dominant earnings driver<\/strong>, while consumer-facing sectors continue to demonstrate resilience. Investor sentiment remains constructive, though positioning has become increasingly optimistic following the recent rally.<\/p>\n\n\n\n <\/p>\n","protected":false},"excerpt":{"rendered":" Macro The dominant macro theme remained the US-Iran conflict and the continued closure of the Strait of Hormuz, as markets increasingly abandoned the view that the disruption was temporary. After more than 80 days of disruption, investors have begun shifting from a “headline risk” framework toward a “persistent supply shock” framework. Brent crude traded around […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1765","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"blocksy_meta":[],"yoast_head":"\n
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