US Economy: Weekly Commentary – May 04, 2026

US Market Review

Treasury yields surged above 5% on inflation fears and supply stress. Equities hit highs with weak breadth. Oil rallied on disruptions, while gold fell and bitcoin edged higher.

Treasury yields rose notably over the week. The U.S. 30-year bond yield surpassed 5% on April 29 for the first time since July 2025, while the 2-year yield also moved higher, reflecting hawkish dissent among policymakers and growing expectations of persistently elevated inflation. Geopolitical tensions and energy supply constraints are reinforcing concerns about a potential second wave of inflation, while reduced activity through key shipping routes has added selling pressure to Treasuries. As yields approach multi-year highs, the fiscal implications are significant: refinancing large volumes of U.S. debt at higher rates could increase interest costs by hundreds of billions, potentially exceeding one trillion dollars over time.

U.S. equity markets continued their upward trajectory, with the S&P 500 reaching another all-time high. However, market breadth remains weak, as declining stocks (around 320) have outnumbered advancing stocks (approximately 180) in four of the last five record highs. Performance across market capitalizations showed micro-cap stocks leading gains (+1.25%), followed by small caps (+0.95%) and large caps (+0.90%), while the “Magnificent 7” rose a more modest 0.45%. Sector performance was mixed, with materials as the only decliner (-1.10%) and energy leading gains (+3.50%).

In currency and commodities markets, the U.S. dollar was broadly stable, slipping just 0.01% against the euro. WTI crude oil surged 8.03%, driven by supply disruptions linked to stalled U.S.-Iran negotiations and reduced traffic through the Strait of Hormuz, a critical global oil transit route. These factors, combined with ongoing geopolitical tensions and constrained shipments, have tightened supply and pushed prices higher. Meanwhile, gold declined 2.11%, while bitcoin posted a modest gain of 0.87%.

US Market Views Synopsis

Fed held rates. Internal divisions remain. Cautious stance. Inflation elevated. US growth 2% driven by tech. Weak consumption. Narrow expansion. No near-term cuts expected. Policy remains restrictive.

The Federal Reserve kept interest rates unchanged at 3.50%–3.75%, but the decision revealed significant internal division, with four dissenters the most since 1992 reflecting disagreement over whether to begin cutting rates or maintain a cautious stance amid persistent inflation risks. The Fed slightly toughened its inflation language and adopted a “wait-and-see” approach, while Chair Jerome Powell emphasised data dependence and warned that price pressures remain elevated, especially given rising energy risks linked to geopolitical tensions. Markets responded by reducing expectations for near-term rate cuts and pushing yields higher. Meanwhile, US GDP grew 2% annualised in Q1, but growth was uneven and increasingly reliant on technology and AI investment, while consumer spending softened and broader business investment weakened. Net trade also weighed on growth due to higher imports. Overall, the economy is expanding but in a narrow, fragile way, leaving it exposed to external shocks, while monetary policy is expected to remain restrictive with no imminent easing.

Interest Rate Decision

Fed holds rates, but record dissent signals division. Inflation outlook hardens, energy risks rise, and markets price fewer near-term cuts amid uncertainty.

The Federal Reserve left its policy rate unchanged at 3.50%–3.75% in Jerome Powell’s final meeting as chair, but the decision was defined less by the outcome than by the extent of internal disagreement. Four policymakers dissented, the largest number since 1992, exposing a committee increasingly split over both the timing and direction of the next policy move. Stephen Miran pushed for an immediate rate cut, while Beth Hammack, Neel Kashkari and Lorie Logan resisted any suggestion that the Fed should retain an easing bias, effectively pushing the statement toward a more neutral and cautious footing.

That shift in tone was reinforced through subtle but important language changes, with officials upgrading their inflation description to “it is elevated” and deliberately emphasising a “wait-and-see” posture. Powell struck a deliberately balanced tone, describing policy as appropriately positioned but stressing that decisions would remain fully data-dependent and flexible in either direction. He acknowledged inflationary risks are not fully contained, warning that price pressures have been “behaving badly,” while also pointing to continued economic expansion and resilient consumer activity despite ongoing shocks.

Energy markets and geopolitical tensions played an increasingly central role in the discussion, particularly the potential inflationary impact of higher fuel prices linked to developments in the Strait of Hormuz. That backdrop has sharpened sensitivity within the committee to any sustained rise in inflation expectations. Markets responded by repricing the policy path, scaling back expectations for near-term easing and pushing yields higher, while the Treasury curve flattened as investors reassessed the timing of any eventual rate cuts. The result is a more cautious and fragmented policy environment, with the Fed signalling patience, but operating under noticeably tighter internal and external constraints than earlier in the cycle.

We expect inflation to stay elevated due to energy shocks and geopolitical tensions, keeping upward pressure on prices. Monetary policy is expected to remain restrictive, with no near-term rate cuts as the Fed stays cautious amid heightened uncertainty.

Economic Growth

US Q1 GDP grew 2% annualised, driven by tech investment and weak consumption. Growth remains narrow, with softening breadth, net trade drag, and rising external risks.

US GDP expanded at an annualised rate of 2% in Q1, below consensus expectations of 2.3%, following a weaker 0.5% outcome in Q4 2025. Adjusting for government shutdown distortions where Q4 growth was depressed by around 1pp and partially reversed in Q1, the average pace across the two quarters is closer to 1.25%, pointing to a clear slowdown relative to recent years. The Q1 breakdown highlights an economy increasingly driven by technology and AI-related investment amid cooling consumer momentum. Consumer spending rose 1.6% QoQ, down from 1.9% in Q4, while residential investment contracted again and net trade subtracted 1.3 percentage points from growth due to a surge in imports. Inflation and labour data were broadly in line with expectations, with core PCE rising 0.3% MoM (3.2% YoY) and the employment cost index increasing 0.9% QoQ, driven mainly by higher benefit costs.

The growth composition remains notably narrow, with tech investment acting as the dominant engine. Software and computing investment rose 24% YoY, while all other categories of business capex have contracted for six consecutive quarters, underscoring a lack of breadth in the investment cycle. Durable goods orders reinforce this pattern, with computer and electronics orders rising 3.7% MoM and 14% YoY in March, suggesting continued strength in tech-led spending through the year. Overall, while the economy entered the period around the Middle East conflict in reasonable shape, the data points to an increasingly uneven expansion that is heavily reliant on tech investment, leaving growth more vulnerable to external shocks such as trade disruptions and energy price volatility.

We expect US growth to remain uneven, with tech and AI investment continuing to drive headline GDP while broader business investment and consumption stay subdued. This narrow growth base leaves the economy vulnerable to external shocks such as trade disruptions and energy price volatility.