Growth holds, inflation builds, markets recalibrate

Global growth remains on solid footing.

With Europe as an exception, PMIs across major economies currently sit above 50, signaling expansion rather than contraction.

While some indicators have softened since the beginning of the year, the data does not support the recession fears that have grown louder heading into the second half of 2026.

Higher energy prices will likely feed through the economy, and we are watching the secondary and tertiary effects carefully.

The boost to consumer goods prices and drag on overall activity is real, but it does not alter our fundamental view that the global economy, and the U.S. economy in particular, remains in solid shape.

A signal worth watching closely is consumer sentiment.

The University of Michigan survey released last week registered its lowest reading on record.

That is a striking data point, and we are not dismissing it.

Yet, as of now, actual consumer behavior has not followed.

There remains a disconnect between how consumers feel and how they act.

Our read on this data is much of the decline in sentiment reflects the impact of inflation on personal finances.

This view is supported by the more constructive picture painted by Conference Board consumer confidence, which places a higher weight on the labor market than assessments of personal finances.

We are watching for any signs of demand being pulled forward as households and businesses try to get ahead of anticipated price increases.

For now, capital expenditure and consumer activity remain strong.

The risk is that a sharper inflation move causes a pause in that trajectory.

Bottom line: The global economy is still expanding, and recession is not our base case.

The gap between consumer sentiment and consumer behavior bears watching, but we do not see evidence yet of a meaningful shift in activity.

Bond market volatility has been the defining feature of financial markets this year, and it has been significantly more intense than equity volatility.

The MOVE Index¹ captures this in fixed income the way the VIX² does in equities, and it is telling us that the market is in the middle of a substantial repricing of rate expectations.

At the start of 2026, the consensus assumed rate cuts across most major central banks.

That consensus view is now unwinding. 

Expectations have shifted toward tightening or, at minimum, extended holds, for most developed market central banks.

The Fed presents a somewhat distinct case given its dual mandate, but even there, the direction of the repricing is clear.

Three structural forces are pushing yields higher.

First, central banks face persistent and broadening inflation that limits their ability to ease. 

Second, fiscal spending is rising across major governments as they respond to geopolitical disruption, supply chain security needs, and defense requirements.

Third, the shock of three major global disruptions over the past six years has prompted a sustained policy response that keeps spending elevated.

Together, these forces create persistent upward pressure on bond yields.

The energy disruption compounds this. 

Even if the Strait of Hormuz were to reopen tomorrow, restoring the roughly 14 million barrels per day currently offline would likely take months.

Vessel insurance costs, inventory rebuilding, and logistical bottlenecks do not resolve quickly either.

We remain underweight duration and reduced Emerging Market (EM) debt exposure in favor of short duration US fixed income exposure at the beginning of the conflict.

We expect to maintain that bias. 

Bottom line: Bond market volatility is running hotter than equity volatility, and the direction of the global rate repricing points toward tighter conditions.