Economic Outlook - June 2026
- Hotter inflation continued to worry the markets in May. Wholesale prices surged in April, much more than expected, according to the Bureau of Labor Statistics. April’s Producer Price Index rose 1.4%, above economists’ expectations for a 0.5% increase. Headline Consumer Price Index increased at an annualized rate of 3.8%. That level is now the highest since May 2023. Annual Core Personal Consumption Expenditures (the Fed’s preferred measure of inflation) rose 3.3% in April, in line with consensus estimates. This tied with November 2023 for the hottest year-over-year print since October of that year.
- Bond yields have spiked higher, reflecting inflation fears among other factors. The release of minutes from the Federal Reserve’s last policy meeting revealed heightened concerns that higher wartime inflation would require the central bank to increase borrowing costs. The case for the Fed to raise interest rates is getting stronger, as inflationary pressures are mounting amidst a backdrop of continued economic growth and stable labor markets. Currently, fed funds futures markets are pricing in one rate increase by December.
- 10-year bond yields have added more than a half point since the start of the Iran War, while longer-dated 30-year bonds have traded at the highest level (in terms of yield) since the day prior to the global financial crisis in 2007. Two-year notes have been trading above 4% since mid-May, the highest in a year and well north of the current Fed rate benchmark of 3.5% to 3.75%.
- The U.S. economy grew more slowly during the first three months of the year than previously thought, updated government data revealed in May. Gross Domestic Product rose at a 1.6% seasonally and inflation-adjusted annual rate, below the 2% rate that the Commerce Department had estimated earlier. We continue to expect that economic growth in 2026 will occur at a more measured pace than in 2025.
- A University of Michigan survey showed that consumer sentiment declined to a fresh record low in May as people fear that high gasoline prices could erode their purchasing power. The retail price for regular grade gasoline in the United States on May 18 (the Monday before Memorial Day weekend) averaged $4.49 a gallon. That price is $1.32, or 42%, more than the price a year ago.
- April’s Personal Income report missed expectations, coming in flat vs. the 0.4% gain that economists expected. Wage growth not keeping up with inflation may hold back consumer spending on big ticket items. Indeed, new home sales for April were weaker than expected, down 6.2% from March and the slowest pace since January.
- Bucking the trend of weak data, orders for durable goods grew at a strong pace in April (+7.9%) and well above expectations, according to the Commerce Department. This represented the second monthly increase in a row. The strength in orders was helped by an uptick in commercial aircraft orders at Boeing and ongoing capital spending on AI.
Sources: U.S. Department of Commerce, U.S. Department of Labor, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Yardeni Research, CME Group’s FedWatch, University of Michigan’s Consumer Sentiment Index
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