US Economy: Weekly Commentary – May 18, 2026

US Market Review

Treasury yields rose across curve. Equity markets mixed. Energy surged. Oil jumped on geopolitical risk. Dollar strengthened. Gold and Bitcoin declined. Inflation expectations and rates rose.

Treasury bond markets sold off across the curve, pushing yields higher. The 30-year US Treasury bond cleared a $25 billion auction at 5.046%, marking the first time since 2007 that long-end yields have exceeded the 5% threshold. The result reflected only moderate demand, as investors required higher fixed returns to compensate for rising inflation risks, particularly amid renewed concerns over energy-driven price pressures. The 10-year US Treasury yield also moved above 4.55% for the first time since May 2025, signalling a notable shift in rate expectations. Market pricing now implies more than a 60% probability of a Federal Reserve rate hike at its next move, with expectations for rate cuts fully unwound, underscoring a renewed “higher-for-longer” inflation narrative.

Equity markets delivered a mixed performance. The S&P 500 posted a modest gain, while the Nasdaq and Russell indices declined, with the Russell falling more than 2%. Smaller segments of the market were under particular pressure, as micro-cap stocks dropped 2%, small caps declined 2.30%, and large caps edged up 0.13%. The Magnificent Seven group outperformed slightly, rising 0.30%. Sector performance was highly divergent: consumer discretionary, real estate, and materials led losses, falling 3.05%, 2.65%, and 2.50% respectively, while energy was the standout performer, surging 6.70%, followed by healthcare, which gained 1.12%.

In currency and commodity markets, the US dollar strengthened by 1.39% against the euro. WTI crude oil surged 11.60%, driven by escalating US–Iran geopolitical tensions that raised concerns over potential disruptions to global supply chains, particularly through the Strait of Hormuz, a key transit route for roughly one-fifth of global oil and LNG flows. Markets priced in a higher geopolitical risk premium amid fears of possible shipping disruptions or escalation, despite no immediate supply impact. Meanwhile, gold declined 3.81% over the week, and Bitcoin fell 1.90%.

US Market Views Synopsis

US inflation rose to 3.8%, driven by energy and food costs. Retail sales remained resilient, though higher prices may gradually pressure consumer spending.

US inflation accelerated to 3.8% YoY in April, up from 3.3% in March and above expectations, marking its highest level in three years as rising energy and food costs intensified price pressures. Higher oil prices, driven by geopolitical tensions, pushed up gasoline, diesel, and electricity costs, while food inflation strengthened due to supply constraints and rising prices for staples. Core inflation also increased, with shelter and services costs remaining persistently high, indicating inflation is becoming more broad-based and entrenched. This raises the likelihood that the Federal Reserve will maintain restrictive interest rates for longer. At the same time, US retail sales rose 0.5% MoM in April, reflecting continued consumer resilience despite elevated costs. Spending gains in fuel, electronics, sporting goods, and online retail offset declines in autos, furniture, and clothing. However, persistently high energy prices and subdued labour market conditions could gradually weaken purchasing power and pressure discretionary spending in the months ahead.

Inflation

US inflation rose to 3.8% YoY in April, driven by energy and food costs. Core inflation and shelter remain sticky, suggesting persistent broad-based price pressures.

US inflation rose to 3.8% year on year (YoY) in April, up from 3.3% YoY in March and slightly above forecasts of 3.7%, marking the highest annual rate in three years and confirming a renewed acceleration in price pressures across the economy. On a monthly basis (MoM), the Consumer Price Index increased 0.6%, following a 0.9% surge in March, showing that price gains remain elevated even after some moderation from the prior month’s spike. The main driver was energy, as geopolitical tensions involving Iran pushed oil prices above $100 a barrel, feeding directly into higher transport, production, and distribution costs. Energy prices rose 3.8% YoY and accounted for more than 40% of the MoM increase in CPI, with gasoline up 5.4% YoY after a sharp 21.2% MoM jump in March, while other motor fuels, including diesel, rose 17% YoY, amplifying cost pressures across logistics, freight, and supply chains. Electricity prices also increased amid strong demand, adding further upward pressure. Food inflation picked up as well, rising 0.5% MoM, with grocery prices up 0.7% MoM, the fastest pace since 2022, driven by higher beef, coffee, fruit, vegetable, dairy, and egg prices, alongside supply-side constraints such as fertilizer shortages that threaten further increases.

Inflation pressures are increasingly broadening beyond energy and food, indicating more persistent underlying momentum. Core CPI rose to 2.8% YoY from 2.6% YoY in March, slightly above expectations, while core inflation increased 0.4% MoM, the strongest monthly reading in over a year, reflecting widespread price gains across services and goods. Shelter remains a key source of stickiness, with rents and owners’ equivalent rent rising around 0.5% MoM, suggesting housing inflation is still firmly embedded despite earlier data distortions linked to collection disruptions. Services inflation also strengthened, with higher airfares, hotel rates, apparel, and household furnishings pointing to ongoing pass-through effects from higher input costs, including energy and tariffs. Market reaction reflected the upside surprise, with Treasury yields rising and equities weaker as investors reassessed the likelihood of earlier rate cuts. Overall, the data suggests inflation is not only elevated but also becoming more entrenched, increasing the risk that the Federal Reserve will maintain restrictive interest rates well into 2027 to fully contain price pressures.

We expect inflation to stay elevated in the near term as energy shocks and sticky shelter costs keep price pressures broad-based. This should limit Fed easing and keep interest rates higher for longer.

Retail Sales

US retail sales rose 0.5% MoM in April, slowing slightly as higher gasoline prices tempered spending, though overall consumption remained resilient despite mixed sector performance.

US retail sales rose 0.5% MoM in April, broadly in line with expectations, indicating continued resilience in consumer spending despite rising cost pressures, particularly in energy markets. Higher gasoline prices contributed to a 2.8% MoM increase in fuel station sales, yet there is limited evidence so far that elevated fuel costs are materially crowding out discretionary spending, even against a backdrop of historically weak consumer confidence. The composition was mixed, with gains in sporting goods and electronics (both +1.4% MoM) and continued strength in non-store retailers (+1.1% MoM), while autos (-0.4% MoM), furniture (-2.0% MoM) and clothing (-1.5% MoM) declined. Given that retail sales account for just over 40% of US consumer spending and consumption represents around 70% of US GDP, the report is an important gauge of how external shocks, including Middle East geopolitical tensions, are feeding through to the real economy. Although current data suggest resilience, underlying pressures are expected to build, even if energy supply risks ease, as elevated prices may persist due to global demand for inventory rebuilding and ongoing uncertainty around supply disruptions and shipping risk premiums. This is reflected in broader price signals, with import prices rising 1.9% MoM, driven by energy but also a 0.7% MoM increase in non-petroleum imports, including a 6.7% rise in industrial supplies likely linked to higher transport costs. Labour market indicators remain stable but subdued, with initial jobless claims edging up to 211k and continuing claims rising to 1,782k, consistent with a low-hire, low-fire environment that supports stability but offers limited momentum for a meaningful rebound in sentiment and consumer spending.

We expect that US retail sales will face increasing pressure in the coming months as persistently elevated energy prices gradually erode real purchasing power and begin to weigh more visibly on discretionary spending, despite the current resilience in overall consumption.