Bond yields climb on US inflation surprise

Equity markets reached fresh highs last week, with the S&P 500 moving into record territory. However, momentum faded towards the end of the trading week as renewed geopolitical and inflation concerns began to weigh on sentiment. 

The Trump-Xi summit in Beijing ultimately delivered less than markets had hoped for. While both sides struck a constructive tone, President Trump’s visit yielded limited tangible progress, including on the Iran conflict. Discussions also highlighted ongoing sensitivities around Taiwan. 

Attention has also returned to the Middle East. The situation involving Iran remains fragile. While there may be a path towards eventual de-escalation, it is unlikely to be linear. Short-term escalation remains possible as both sides seek to strengthen their negotiating positions. With the Strait of Hormuz still effectively closed, risks are rising that energy‑related price pressures become more broadly embedded across the global economy. 

While the Iran conflict has so far had only a moderate impact on growth, the effect on inflation has been more pronounced, as reflected in recent US data. Both consumer and producer price inflation surprised to the upside. Headline CPI rose to around 3.8% year-on-year, while core inflation, which excludes more volatile components such as food and energy, came in at approximately 2.8%, remaining well above the 2% target of the Federal Reserve (Fed). While higher energy prices have been a key driver, underlying pressures remain broader, with services inflation proving sticky. 

Against this backdrop, global bond yields have moved higher, with the US issuing 30-year debt at a 5% coupon for the first time since 2007. Investors are reassessing expectations for future policy rates and the implications of higher yields for asset valuations. The Fed is likely to remain in a wait-and-see mode. While the bar for rate hikes remains high, near-term easing also appears unlikely. Provided the Strait of Hormuz does not remain effectively closed for an extended period, a modest rate cut later in the year remains possible. 

In the UK, persistent inflation concerns alongside rising political uncertainty have added further upward pressure on gilt yields. Recent developments have weakened Prime Minister Keir Starmer’s position following a high-profile cabinet resignation, triggering speculation around a potential Labour leadership challenge. While the situation remains fluid, the prospect of political change is adding uncertainty to the fiscal outlook.

The Q1 2026 earnings season is now in its final stage. Around 90% of companies in the US and Europe have now reported. Results have been stronger than expected, especially in the US. This suggests that corporate conditions remain resilient, despite ongoing macroeconomic and geopolitical uncertainty. 

In the US, earnings growth has been strong. Earnings per share rose by around 23% compared with a year ago. Large technology companies, like the ‘Magnificent Seven’, again delivered solid results. However, strength was not limited to this group. Excluding these companies, earnings growth across the broader market remains healthy. Median results point to double-digit growth. 

In Europe, earnings growth has been slower but remains supportive. Earnings per share rose by around 5% year-on-year. This reflects a softer economic backdrop and differences in market structure. European equity markets are more exposed to sectors like financials, industrials and energy and less to technology. Technology has seen the strongest earnings momentum, supported by continued investment linked to AI, which is one reason for Europe lagging slightly. 

Overall, we maintain a moderate preference for equities over bonds in portfolios. In our view, solid earnings and still-supportive economic conditions continue to lift risk assets, even as uncertainty remains elevated. 

Our equity exposure remains diversified across regions, sectors and investment styles. This helps balance potential upside with the need to manage volatility linked to macroeconomic and geopolitical developments. 

Within fixed income, we favour high-quality government bonds over riskier areas of credit, where valuations remain stretched. We remain underweight US Treasuries, reflecting inflation pressures and upside risks to yields. Portfolios also retain exposure to inflation-linked bonds and commodities as a hedge against inflation and geopolitical risk.

This week will bring the global flash purchasing managers’ indices (PMIs) for May, due Thursday across major economies including the US, UK and the Eurozone. These will provide an early reading on how activity is evolving, with investors closely monitoring whether higher energy prices and geopolitical tensions are beginning to weigh more meaningfully on business sentiment. 

In the US, attention will turn to housing data and the Fed minutes on Wednesday. Markets will look for further clarity on how policymakers assess the inflation outlook and what this implies for the expected policy path. 

In Europe, the focus will be on the UK, with labor market data on Tuesday and inflation on Wednesday. At the Eurozone level, consumer confidence and Germany’s Ifo survey, due Friday, will provide additional insight into the resilience of the regional economy. 

On the corporate side, Nvidia’s results on Wednesday will be a key focal point. As a bellwether for the AI investment boom, its earnings and forward guidance will be closely watched for signals on the strength and sustainability of AI-related demand.