It's a story of continued uncertainty out there. Will the latest conflict in the Middle East continue to spread or are we near the end? Is AI really changing the game? Can jobs hold up if it does? Whilst only a month since the last musings, news moves fast. With all this and more unfolding in what is historically a quieter time of year, I do hope our readers get some personal respite. The good news is earnings season has kicked off and surprises have been on the upside. In size.
This time last month we had what looked like a ceasefire, a path to peace, and an inflation and interest rate outlook that had digested this positive news. Oil was cheapening and starting to move around the globe again, clarity and certainty around trade were returning, input (and therefore output) prices were looking more manageable, as was being able to forecast spending and investment with a higher degree of certainty.
What we have seen since is a geopolitical risk premium returning to pricing, in particular of oil, which, being a key input, means we expect to see the continued upward march of rate expectations, in particular should we see a Houthi blockade of the Red Sea both invoked and maintained. Roughly 7% of global trade moves through here (The Economic Times). Not only has the conflict escalated, drawing in more nations, targeting is now squarely on civilian infrastructure: the kind that takes both time and money to repair, along with the supply chains it once served. Inflation going away any time soon? Feels harder to imagine at this point in time.
The IMF released the July 2026 Work Economic Outlook update and it genuinely made for interesting reading. We are now at the “Crosscurrents of War and Technology”. Global growth is seen to hit 3%, although dispersion is high. Booms in exports have been seen in those nations embedded in supply chains of tech and semi-conductors, and predominantly located in South East Asia. The trouble is though they can also be the most affected by energy price disruptions that, if persistent, will lead to significant drag. Disinflation once again a story from a bygone era, with 2026 global headline inflation to print at 4.7% (0.6% above ‘25) before cooling off next year (International Monetary Fund).
We are back into earnings season. Records have been broken, in phenomenal style. As always, the first to enter the arena were financial services, often a bellwether for what is to come from other sectors. Hoping this time it remains true! Below is a quick summary of some of the largest that have posted at the time of writing…
In other news, the sell-off in AI and chipmakers is seen as done for now, the bulk of faster flows from the hedge fund community now repositioned (CNBC). Despite this “repricing”, the equity markets remain in full bull mode. Year to date, most indices remain at least modestly up, with Spain and Italy leading Europe (+12%, +16% respectively), whilst the US across the three majors (S&P, Dow Jones & NASDAQ) all flirting with double-digit growth. These figures though, are all dwarfed in comparison to what has been happening over in Asia. The KOSPI (South Korea, +60%), Taiwan TAIEX (+52%), and even Tokyo’s Nikkei 225 (32%) have crushed it despite some pullback earlier in the month (Bloomberg).
Primary markets have continued the theme of the year, in that they remain busy, and heavily driven by AI-funding supply. Amazon’s $25 billion (8-part) sale earlier this month was the seventh $25 billion-plus tech bond deal to hit the street this year. Demand though appears to be waning somewhat, with bids at 2.5 cover (2.5 bids for every unit of issuance), down from 3.2 just three months prior, and the least demand seen since October of last year when Meta came to market for $30 billion (Bloomberg).
But what of spreads? Tame for now but creeping wider as equities wobbled. The ICE BofA US HY (high yield) OAS was ~280bp and the BBB IG (investment grade) OAS ~96bp, both still tight versus long-run averages. (FRED). Think of these as premia paid over and above the risk-free rate which have also thus seen nominal gains as curves have steepened. The space continues to draw more attention though as both bond and equity issuance powers ahead, with players in high yield (or speculative/junk) and investment grade debt watching for any signs of weakness (Schwab). The good news for now is that no major deal has been pulled despite the volatility, nor have we seen any significant downgrades.
The next meeting, selfishly, falls right on publication date here (Thursday 23rd). Early June saw the ECB hike 0.25% and since then there has been no real change in conviction for, well, no change this month. September though is pricing (according to market participants) a 90% chance of a further 0.25% increase. As we look ahead to the end of the year and beyond, come Christmas there is a strong likelihood of another 0.25% (at 75%) hike. June’s move was the first increase since 2023, now it appears they are coming like buses.
Whilst inflation eased in June, it does remain elevated with core at a respectable 2.4% (2.6% prior month) and services at 3.2% (3.5% prior). Energy remains the elephant in the room and given the dependance on both importation as well as being pegged to oil and gas, the drop from 10.8% to 8.7% remains both very elevated and temporary in nature given all that is happening (Bloomberg). A weakening Euro when buying dollar assets also sub-optimal and inflationary.
To be frank, growth is a problem. Euro-area GDP dropped 0.2% quarter-on-quarter with the annual figure dropping to +0.3% from +1.2%. The key driver here being touted as net trade. With the cost to import major inputs, it is hard to see much improvement in the near-term (Eurostat).
A new month, a new Prime Minister? It’s not quite that glum, but turnover at the top has not abated! We have been promised no material change from the manifesto that brought Labour to power. Whilst this may be true, the question remains whether it remains right. With the former Defence Secretary as incoming Chancellor, The Right Honorable John Healey, we are all watching to what extent he is about taxing and spending. A not so good sign is that he had previously resigned having faced opposition to the issuance of additional debt, albeit to invest in (more) defence. The market did at least show support for his appointment, with gilt yields off recent highs.
The recent meeting of global central bankers in Sintra (29 June to 1 July) offered nothing new from Governor Bailey. The Bank remains data-driven, in no rush to move and very much in wait-and-see mode. If this sounds boring to you, that probably isn’t a bad thing. There was though a reiteration of risk in the financial system stemming from leverage in government bonds (Reuters).
Whilst the Bank of England meets next week, no change is expected until November, where 0.25% (up) is still on the cards. Slightly surprisingly there is also a reasonable chance of an additional hike in December (56%, data from Bloomberg). The Monetary Policy Committee meets next week in part to vote in rates. Whilst no change is expected, we may well see more support for higher sooner, in which case expect to see a fairly rapid change to the slope of steepening currently reported on.
In terms of growth… good news. There is some! Q1 GDP finalised at 0.7% QoQ / 0.9% YoY (released 30 June). A modest revision but confirming the surprise strength led by services and wholesale/retail trade. May monthly GDP +0.1% on the month (vs 0.0% consensus, after -0.1% in April), up 1.3% YoY, led by a 0.3% rise in services. Q2 tracking clearly softer, with June composite PMI at 49.3 (mild contraction), services contracting, and construction weak (ONS).
Next week also sees the Federal Reserve rate decision and announcement. Directionally there was good news around inflation, having cooled somewhat. June CPI rose 3.5% year-on-year, below the 3.8% consensus, with headline down 0.4% month-on-month. This represents the largest one-month fall since April 2020. Core held at 2.6% YoY (unchanged on the month). (BLS).
The dual mandate of the Fed ensures employment remains front and centre of policy. In short, since the last update, the market cooled. June nonfarm payrolls rose just +57k (vs +115k expected and a downward-revised +129k in May). Unemployment fell though, to 4.2%, on a lower participation rate (61.5%), and average hourly earnings rose 0.3% in the month to $37.64 (BLS).
Whilst improved inflation and jobs data near "extinguished" a hike at the Fed’s 28/29th July meeting, increasing tensions in the Gulf may cause increased inflation risks and push the Fed to hike off a single report. Counter to this inflationary risk, changes to PCE calculation methodology are due to go live in Sep - which could wipe out 0.2% of price growth.
More good news coming in the form of growth, which held up. Q1 GDP was revised up to +2.1% annualised (third estimate, from +1.6%), with the Q2 advance estimate due very late July. (BEA).
One interesting move in the world of cash came from the reduction in average tenor in Government money market funds in the US. Recent volatility, particularly a little further out, has brought with it caution to those constructing such portfolios. Why is this relevant? At this point there is in excess of $8 trillion invested (Bloomberg). When that market moves, it is hard to see how asset pricing can remain unaffected. Should the trend continue, one should expect more pressure on front end rates, whilst premiums for tenors longer than the new cliffedge rise. Good if you have visibility over your cash and access to take advantage…
We find ourselves in a world with uncertainty and likely inflation back on the rise. The combination of higher risk and higher return is no easy environment to navigate. Growth and performance continues to diverge, with developed markets once again falling behind some of the rapid growth witnessed in Asia in particular. If only there were somewhere to take advantage of the global opportunity in cash out there in a single place!
*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.