The US macro picture deteriorated this month, even though risk asset performance wouldn’t suggest it. 

The United States’ Q1 2026 GDP was revised down to an annualized rate of 1.6%, from the 2.0% estimate and previous reading. The downward revision was driven primarily by weaker private inventory investment and softer consumer spending on healthcare services. Equipment investment remained a bright spot, surging 17%, reflecting sustained business capital expenditure on AI.

Inflation has meaningfully accelerated. Core PCE inflation within the GDP report was revised up to 4.4% while headline CPI rose 3.8% year-on-year in April, up from 3.3% in March and above the 3.7% consensus. This is the hottest reading since May 2023. Core CPI rose to 2.8% year-on-year from 2.6%, with a 0.4% monthly increase, the sharpest since January 2025. Energy was the primary driver, accounting for over 40% of the headline increase. On the PPI side, producer prices surged 1.4% month-on-month in April, the largest advance since March 2022 and the highest since December 2022.

Core PCE came in at 0.2% monthly and 3.3% annually. The monthly core reading was slightly softer than feared, but the annual rate is its highest since 2023 and well above the 2% target. Real disposable income fell 0.5%, the second consecutive monthly decline, and the personal saving rate dropped to 2.6%. It’s at its lowest since mid-2022.

On the labour front, nonfarm payrolls added 115K jobs in April, a notable slowdown from 185K in March. Unemployment held steady at 4.3%. Job gains were concentrated in healthcare, transportation and warehousing, and retail trade, while federal government employment continued to decline. The labour market is cooling but not cracking, yet.

Retail sales rose 0.5% month-on-month in April, the third consecutive monthly increase but a marked deceleration from the revised 1.6% surge in March. Gasoline spending remained a major component, up 2.8% after jumping 13.7% in March. Consumers are spending, but they're drawing down savings to do it, which is unsustainable.

The ISM manufacturing PMI held at 52.7 in April, marking the fourth consecutive month of expansion. New orders expanded for the fourth straight month at 54.1. The concerning signal is the Prices Index, which vaulted to 84.6, a 6.3-percentage-point jump from March and its highest level since April 2022. Input cost inflation is running extremely hot.

The UK delivered a mixed bag this month. The headline surprise was inflation, as CPI fell sharply to 2.8% in April from 3.3% in March, below even the Bank of England's own 3.0% forecast and the lowest reading since March 2025. However, this drop was almost entirely driven by a 7% reduction in the Ofgem energy price cap that took effect on April 1. Motor fuel prices still surged 23% year-on-year, the highest since September 2022. Core CPI also fell to 2.5% from 3.1%.

UK Q1 GDP grew 0.6% quarter-on-quarter, a meaningful acceleration from the revised 0.2% in Q4 2025. Monthly GDP grew 0.3% in March, following 0.4% in February (revised down from 0.5%); however, January was revised down to flat growth. The Q1 strength came before the full impact of the war in Iran and higher energy prices, so the outlook is considerably more uncertain. The April GDP estimate is due June 12.

On the labour front, the unemployment rate ticked up to 5.0% (Jan-Mar 2026) from 4.9% previously. Payrolled employees fell by an estimated 100,000 in April on a month-on-month basis, the weakest reading since the pandemic period. Vacancies dropped to 705,000, the lowest since early 2021. 

The flash Manufacturing PMI held at 53.7 in May, unchanged from April and matching the highest since May 2022. However, the services PMI collapsed to 47.9, a 64-month low, dragging the composite PMI to 48.5, marking the first contraction in private-sector activity since April 2025.

Gilt yields surged mid-month, with the 10-year touching 5.11% (the highest since July 2008) and the 30-year hitting 5.8% (the highest since 1998), before retreating to around 4.8% by month-end as optimism over the Iran deal took hold.

Mortgage rates moved sharply higher this month. The 30-year fixed mortgage rate climbed by more than 20 basis points, hitting its highest level in 9 months. This marks the 10th consecutive month that inflation has outpaced national home price appreciation, meaning U.S. homes continue to lose value in real terms.

Existing home sales barely budged, rising just 0.2% month-on-month to 4.02 million, well below the 2.1% expected and a sluggish start to the spring selling season. Sales were unchanged year-on-year. Total housing inventory rose 5.8% to 1.47 million units, the highest for any April since 2019, with a months' supply of 4.4. The median existing home sale price was $417,700, up 0.9% year-on-year, the 34th consecutive month of year-on-year price increases, though the pace of appreciation is slowing rapidly.

Sales of new homes are also drifting lower, down by more than 6% month-on-month and well below expectations.

The Case-Shiller Home Price Index showed the national index rose only 0.8% year-on-year in March, down from 0.9% in February, the 14th consecutive month of decelerating price growth and the lowest since June 2023. After seasonal adjustment, the national index fell 0.2% month-on-month. 

The UK housing market weakened further, confirming the deterioration flagged last month.

The Halifax House Price Index showed UK house prices fell 0.1% month-on-month in April, following a 0.5% decline in March. Annual growth slowed to just 0.4%, down from 0.8%, significantly below the expected 0.6%.

The RICS House Price Balance fell to -34% in April, down sharply from -25% in March, marking the weakest reading since November 2023 and well below expectations of -25%. New buyer enquiries remained firmly negative at -34%. Agreed sales were weak at -36%. The regional divide widened further, with London, the Southeast, East Anglia, and the Southwest seeing the steepest declines, while Northern England, Scotland, and Northern Ireland maintained marginally positive readings.

Retail sales grew just 0.2% year-on-year in April, a dramatic miss versus the 2% expected and the weakest since December 2022. Industrial output decelerated to 4.1% from 5.7%, also well below the 5.9% forecast. Urban fixed asset investment contracted 1.6% in the first four months. The war in Iran has weighed heavily on consumer confidence, with big-ticket categories like autos, appliances, and furniture contracting.

For housing, there is still no light at the end of the tunnel. New home prices across 70 cities dropped 3.5% year-on-year in April, slightly worse than the 3.4% decline in March. This is now the 34th consecutive month of price contraction and the sharpest pace since May 2025. Shanghai remains the sole major exception, with prices still rising 3.7% year-on-year.

May was the month the bond market caught fire. Unlike April's relatively quiet 10-basis-point drift higher across the curve, May saw dramatic moves. The 30-year Treasury yield surged to a high of 5.2%, its highest level since July 2007, driven by hot inflation, international selling and weak auctions. It has now retreated to the 5% mark after ceasefire optimism in Iran and institutional demand at auctions. The 10-year yield ended May around 4.44%, up roughly 7 basis points on the month. The 2-year rose more sharply, up about 14 basis points to 4%, reflecting hawkish repricing of the near-term rate path.

The biggest structural event was the swearing in of Kevin Warsh as Fed Chair, replacing Jerome Powell (who remains on the Board). Warsh was confirmed 55-45, the narrowest margin in modern Fed history. At his confirmation hearing, he described his approach as "a regime change in the conduct of monetary policy." His first FOMC meeting is June 16-17, which includes the Summary of Economic Projections and the dot plot, arguably the most important Fed meeting of the year.

The April FOMC minutes (released May 20) revealed a deeply divided committee under Powell's final meeting: an 8-4 vote to hold at 3.50-3.75%, with one governor seeking a cut and three regional bank presidents opposing even the hint of future easing in the statement. A "majority" of participants indicated that a rate hike would probably be necessary if inflation remains above 2%.

Rate expectations have shifted dramatically. The market now prices in a full hold at the June meeting. But looking further out, by December, the market assigns roughly a 52% probability of rates remaining unchanged and a 48% probability of at least one rate hike, a massive shift from last month, when the odds of a hike were below 10%. Rate cuts have been priced out entirely for 2026 (from 13% likelihood a month ago). 

We remain bearish on bonds. The combination of sticky inflation, fiscal deficits, heavy Treasury supply, and a new Fed chair whose rhetoric leans hawkish all argue for continued pressure on the long end. The 30-year at 5% is the new reality and may not be the ceiling.

We are now exactly three months into the Iran war, and May was a month of two halves. Early in the month, Brent remained firmly above $100, touching a high of $113. The Strait of Hormuz remained effectively closed to non-Iranian shipping, with mines, attacks, and U.S. naval blockade all restricting flows.

Then, towards the month-end, everything shifted as the rhetoric was one word: deal. Reports emerged that U.S. and Iranian negotiators had agreed on a 60-day memorandum of understanding (MOU) to extend the ceasefire, reopen the Strait of Hormuz, and begin nuclear program talks.

Trump announced he would make a final decision from the Situation Room. Crude plummeted by almost 20% in May, its worst monthly performance since March 2020 (the Covid crash). But the devil is in the details. Trump's stated conditions include Iran agreeing to never have a nuclear weapon, immediately opening the Strait to unrestricted two-way traffic without tolls, removing all mines within 30 days, and allowing the U.S. to destroy buried enriched uranium. These are conditions Iran has historically rejected. Neither side has formally signed anything as of month-end. U.S. strikes continued even as negotiations progressed, with Iran accusing the U.S. of violating the ceasefire.

The market is dangerously disconnected from the supply reality, with global inventories depleting at a record pace. Even if a deal is signed, shipping normalization will take months due to minesweeping, insurance requirements, and infrastructure repairs. The SPR releases coordinated by the IEA have already been lost, as we enter the third full month of disruptions.

The market is essentially trading a binary outcome: Hormuz reopens (Brent sub-$90), or it doesn't (Brent back above $110). We think the risk-reward at $90 is skewed to the upside, given how tight the physical market remains and how far the deal is from execution. However, if real peace materializes, the unwinding of the war premium could quickly take oil back to the mid-$80s. In that scenario, we think there is value in buying backend crude and cracks, as the supply disruption will very likely take the rest of the year to normalize. For now, this remains the hardest trade in macro. In a way, the administration has managed to fight higher energy prices by inflating volatility, making it harder to run big levered positions. 

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