The Strait of Hormuz remains closed and the price of oil remains elevated leading to global bond selloff last week. While US equities mildly corrected on Friday, last week action was in bond markets. 10-year UST yields climbed 25bp over the past week and nearly 70bp since the conflict began. Markets have now fully priced one Fed hike by March, whereas last Friday that was closer to a 10% chance. US economy remains strong as seen in macro data and we now expect Q2 GDP at 2%. The economy benefited from the wave of personal tax stimulus in March and April, and business surveys suggest firms may have brought forward activity to get ahead of future price increases and supply chain delays. The fading tax stimulus would be less of a concern if oil prices were to quickly retrace in coming weeks, but that seems increasingly unlikely. We now expect Brent prices to remain sticky in the low $100/bbl even after the Strait reopening, eventually averaging $95/bbl for CY2026, as the bottleneck will shift from the physical chokepoint of the Strait to tanker availability and strong demand to rebuild inventories. Futures markets are not that far below and see crude still at $91 in December. Since the outbreak of the Middle East conflict our forecasts for headline PCE inflation this year have risen about 0.8% Q4/Q4, and real disposable income growth has slid by the same amount. While the job markets continues to remain stable, inflation worries are front and center. Inflation data released last week were broadly hawkish, pointing to signs of building price pressures. We have revised up our core PCE tracking estimate to 0.30% m-om, which translates to 3.3% y-o-y, significantly above the Fed’s target. Tech-related components are emerging as a new source of inflation, offsetting some slowdown in tariff-sensitive consumer goods. PPI’s price index for rubber and plastic products jumped in April. PPI’s truck transportation prices rose at their fastest pace in the series’ two-decade history, driven by higher fuel costs as well as limited capacity in the truck industry. In summary, Fed remains on hold for next several months. We still expect a 25 bps cut in Q4CY26 as an insurance cut if inflation shows signs of stabilising or if there is a resolution on SoH. This week in US macro data we have Fed minutes, S&P PMIs, IJC, Univ of Michigan survey. In dated supply, we have $16 BN of 20 yr UST auction on Wednesday & $19 BN of 10 year TIPS on Thursday. In RoW data we have Canada CPI, UK CPI, UK fiscal deficit, Japan CPI & GDP along with Chinese activity data.
