Global Fixed Income Strategy - May 2026

Global macro strategy

Revising our US macro outlook: Resilient growth, sticky inflation and the Fed on hold

Executive summary
 

• We have revised our 2026 US macro outlook in the wake of the Iran war ceasefire. While higher energy prices are likely to push headline inflation higher than we previously estimated in the near term, we’ve downshifted our growth outlook, though growth should stay around potential, bolstered by resilient domestic demand and structural buffers in the US economy.

• Our expectation of sticky core inflation at around 3% complicates the Federal Reserve's (Fed) path to normalization and reinforces a cautious policy stance. In this environment, we expect the Fed to remain on hold this year, with scope for gradual easing only once inflation risks clearly recede.

• This baseline view rests on the assumption that geopolitical tensions do not re-escalate. Markets appear to place little weight on more adverse scenarios, even though the economic costs of renewed disruption—particularly through energy markets—would likely be nonlinear and significant.

Growth at potential

We have revised down our US growth projections amid the conflict in the Middle East—but our growth outlook remains resilient. Our revision mainly amounts to reducing the odds that growth could accelerate and reach above-potential levels—at least for a couple of quarters. We now expect GDP growth to remain around potential, still slightly above consensus. In the weeks following the ceasefire, oil prices have stabilized and incoming March data have been broadly consistent with our outlook. 

Inflation and the Fed 

We expect headline inflation to rise in the near term due to higher energy prices and expect core inflation to remain around or above 3% for much of the year—longer than we had previously expected. Rising risks of second-round effects will likely delay any Fed easing toward its estimate of the neutral rate. The timing of the next move is highly uncertain; we tentatively assume that policy will remain on hold this year and have penciled in two cuts for the first half of next year.

Oil shock a potential growth drag, not a recession trigger 

While elevated oil prices represent a genuine headwind to growth, they are not at levels historically associated with recessions (Figure 1). In real terms, crude remains well below the non-recessionary peaks reached in 2011–12 and again in 2022, suggesting that the current price environment, though uncomfortable, is not recessionary. Importantly, this assessment is not based on oil prices alone; broader macro conditions also matter. The 2011–12 episode is particularly instructive: Oil prices were higher in real terms than they are today, and the economy was arguably more vulnerable—households were deleveraging in the aftermath of the global financial crisis, and banks were raising capital and repairing their own balance sheets. Even under those fragile conditions, elevated oil prices did not tip the economy into recession.