US Economy: Weekly Commentary – February 16, 2026

US Market Review

Bond prices rose as the yield curve steepened; US stocks fell, led by mega-caps. Dollar weakened, oil declined, gold and silver remained highly volatile, China demand concerns persisted.

This week’s inflation and employment data have triggered a notable rise in bond prices, as investors seek refuge in safer assets. The US yield curve is steepening rapidly: the spread between 10-year and 2-year Treasury yields has widened significantly over the past 2.5 years. The curve has remained positive for 14 months, now reaching its highest level in four years. Historically, such a sharp positive shift in the yield curve has coincided with the US economy entering a recession. In the current cycle, the move appears driven by a combination of anticipated interest-rate cuts amid a weakening labour market and growing concerns over escalating US public debt and substantial budget deficits.

US equity markets ended the week lower. Micro-cap and small-cap indices declined by 1.70% and 0.80%, respectively, while large-cap stocks fell 1.40%. The "Magnificent 7" dropped 3.25%, with Amazon recording its ninth consecutive day of losses, marking its longest streak since 2006. Sector performance was mixed: utilities rose more than 7%, followed by real estate at 3.60%, while financials fell 4.80% and consumer discretionary declined 1.55%.

The US dollar declined 0.43% versus the euro. WTI crude fell 1.09%, posting its first consecutive weekly loss this year amid potential OPEC+ supply increases, US-Iran nuclear talks, and signs of global economic weakness. Markets also weighed growing scepticism over a major demand surge from China that energy firms had long anticipated. Gold advanced 1.51% amid elevated volatility, as did silver, while Bitcoin declined 2.80%.

US Market Views Synopsis

US inflation eased to four-year lows. Job gains were narrow. Retail sales stalled. Fed rate cuts are expected. Service pressures and energy shocks could trigger temporary rebounds.

US economic data through early 2026 paint a mixed picture, with inflation easing but underlying risks and uneven activity across labour and consumer markets. Headline CPI slowed to 2.4% YoY and core to 2.5%, four-year lows, yet price growth remains above the Fed’s 2% target. Energy and used vehicle prices moderated, while core goods excluding food and energy were flat, reflecting tariff absorption by corporates. Airline fares jumped 6.5% MoM, and service-sector pressures persist, leaving the possibility of temporary inflation rebounds. Markets have turned dovish, pricing roughly 63 bp of Fed rate cuts, and new Fed member Kevin Warsh could accelerate easing, potentially influencing inflation dynamics. Labour market data were mixed: January nonfarm payrolls rose 130k, exceeding expectations, but a record -862k 2025 revision and narrowly concentrated health-related hiring reveal weaker underlying momentum. Retail sales stalled in December, with declines in autos, furniture, electronics, and clothing. Slower wages, depleted savings, and rising living costs point to subdued consumer spending.

Inflation

US inflation eased to four-year lows, with headline at 2.4% YoY and core at 2.5%. Markets turned dovish, pricing deeper Federal Reserve rate cuts after the data.

US inflation cooled further in January, with both headline and core CPI easing on a YoY basis to four-year lows, though price growth remains above the Federal Reserve’s 2% target for a sixth consecutive year. Headline inflation slowed to 2.4% YoY from 2.7% in December, while core CPI edged down to 2.5% YoY from 2.6%, broadly in line with expectations. On a monthly basis, headline prices rose 0.2% and core increased 0.3%. The moderation was driven in part by a 1.5% MoM decline in energy prices and a 1.8% fall in used vehicle costs, while housing inflation rose a modest 0.2% MoM, suggesting ongoing (albeit gradual) disinflation in shelter. Core goods prices excluding food and energy were unchanged on the month, reinforcing the view that tariff-related costs are being largely absorbed by corporates rather than passed through to consumers, despite firms continuing to pay materially higher duties than a year earlier. That said, import prices have yet to show sustained declines, and with earlier inventory front-loading ahead of tariff increases now largely exhausted, there remains a risk of residual pipeline pressures as trade flows normalise. The principal upside outlier was airline fares, which surged 6.5% MoM; however, given that the Fed’s preferred core PCE deflator draws on producer rather than consumer price data for air travel, the impact on that gauge may prove more limited, raising the prospect of a softer core PCE print in the coming release. Financial markets responded in a dovish fashion: the 10-year Treasury yield fell to 4.08%, its lowest level of the year, and futures markets moved to price roughly 63 basis points of Federal Reserve rate cuts over the next 12 months, up from around 57 basis points prior to the data.

We expect inflation to ease gradually, though service pressures and energy shocks could trigger temporary rebounds. New Fed member Kevin Warsh could cut rates sooner and more aggressively, potentially fueling another inflation uptick.

Labour Market

Payrolls beat expectations. A record -862k revision and narrow health-led hiring expose weak momentum. This reinforces expectations of at least two Fed rate cuts this year.

US nonfarm payrolls rose by 130k in January, comfortably above the 65k consensus, while the unemployment rate edged down to 4.3% and average hourly earnings increased 0.4% MoM, beating expectations. However, the final benchmark revision for 2025 payrolls came in at -862k, the largest downward adjustment since 2009, underscoring a much weaker underlying trend, with payroll employment averaging just +15k per month over the year. January’s gains were narrowly concentrated in health-related sectors: health care added 82k jobs, led by ambulatory services (+50k), hospitals (+18k) and nursing and residential care facilities (+13k), while social assistance rose 42k, largely in individual and family services (+38k). Construction increased by 33k, driven by nonresidential specialty trade contractors (+25k), but was broadly flat across 2025 as a whole. In contrast, federal government employment fell by 34k and is now down 327k, or 10.9%, since its October 2024 peak, while financial activities declined by 22k in January and are 49k below their May 2025 high, including an 11k drop in insurance carriers. The household survey showed full-time employment jumping by 890k to 135.215mn, while part-time employment fell by 740k to 28.712mn, a sharp reversal from the prior month that adds volatility to the signal. With job creation heavily concentrated in a handful of sectors and broader industries struggling to generate sustained momentum, the report reinforces expectations that the Federal Reserve will deliver at least two 25bp rate cuts this year, with risks skewed toward a more dovish outcome if labour market breadth fails to improve.

We expect at least two 25 bp Fed rate cuts this year. Job growth remains narrowly concentrated, with weaker demand and cooling wages signalling broader labour market softness.

Retail Sales

US retail sales stalled in December, with core sales down 0.1%. Spending fell on autos, furniture, electronics, and clothing. Wages slowed, savings declined, and small-business optimism eased. Growth pressures persist.

US retail sales unexpectedly stalled in December, highlighting emerging weakness in consumer spending as households pulled back on motor vehicles, furniture, electronics, and clothing. Headline sales were flat month-on-month, while core retail sales, which exclude autos, gasoline, building materials, and food services, declined 0.1% following a downward revision to November. Auto dealership receipts fell 0.2%, furniture and home stores declined 0.9%, electronics and appliance sales slipped 0.4%, and clothing stores dropped 0.7%, offset partially by gains in building materials and garden equipment at 1.2% and sporting goods, hobby, and book stores at 0.4%. Online sales edged up 0.1%, and food services receipts fell 0.1%. October retail sales were also revised lower, reflecting ongoing consumer fatigue amid rising living costs, tariffs, and a cooling labour market. Household wealth remains elevated from strong equity markets and high home prices, benefiting higher-income Americans, while wage growth has slowed, savings are depleted, and lower-income households face mounting pressure. Small-business sentiment eased in January, with the NFIB Optimism Index falling to 99.3, though 16% of owners expect higher sales in the coming quarter and 15% view now as a favourable time for expansion. The data underscore growing divergence in spending patterns, with lower- and middle-income households increasingly constrained even as AI-driven industrial and service sectors continue to support broader economic growth.

We expect consumer spending to remain subdued in early 2026 after US retail sales stalled in December, as slower wage growth, falling savings, and rising living costs continue to weigh on household demand.