Capital markets digest

Market insights

Wholesale inflation hits multi-year high: Geopolitical standoffs and unexpectedly strong inflation data drove a risk-off sentiment in markets last week. Brent Crude oil prices rose by more than 7% over the week as the Strait of Hormuz remained effectively closed, with war-driven energy costs showing signs of the potential of leaking into broader consumer and producer prices. The April Consumer Price Index YoY accelerated for the second consecutive month, while the Produce Price Index surged to its fastest annual pace since 2022. Both prints exceeded consensus estimates and reinforced market expectations of no rate cuts in the near term and tilt the odds toward a hike over a cut for the next Fed rate adjustment. Retail Sales revealed growth again for the third consecutive month, pointing to some signs of consumer resilience. However, because the index does not adjust for inflation, the increase may be reflective of higher prices rather than increased sales volumes. This distinction is underscored by the fact that the bulk of the gain was driven by food and gasoline sales, two sectors that are most directly exposed to the inflationary pressures stemming from the Strait of Hormuz disruption. In a Fox News interview last Thursday, Trump said Xi offered to help broker an end to the Iran conflict and supports freedom of navigation through the Strait of Hormuz, with Trump quoting Xi as saying “if I can be of any help at all, I would like to be of help.”  However, Trump separately stated that the U.S. “does not need” the Strait of Hormuz open, a comment that deepened oil market anxiety. With no formal agreement reached and the Strait remaining closed, Treasury yields pushed higher through the end of the week.

Hike more likely than not? Treasury yields broke year-to-date highs last week, driven by a combination of two consecutive hot inflation prints and a tense geopolitical backdrop. The policy sensitive 2-year Treasury yield rose approximately +18 bps over the week to end at 4.07%; while the benchmark 10-year Treasury yield climbed nearly +24 bps from the prior week’s close before finishing at 4.59%, the highest weekly closing level since January 2025. The CME FedWatch Tool currently shows around a 55% chance of the Fed increasing their target range by at least a quarter point in January 2027. This is a stark contrast from the less than 20% odds indicated a week ago. New York Fed President Williams (FOMC voter) defended the current monetary policy stance last Thursday, stating that monetary policy is “in a good place” with “no reason to raise or lower rates,” though his comments did little to calm Treasuries or markets’ expectations. Adding to the backdrop, the Senate confirmed Kevin Warsh as the next Federal Reserve Chair last Wednesday, succeeding Jerome Powell whose term as chair expired Friday. While Warsh has previously stated that interest rates should be lower, he made no such commitment during his confirmation process.  With inflation running hot, any near-term easing looks increasingly out of reach.

Freddie Mac PC issuance explodes: New issue Fannie Mae DUS/MBS activity was marginally more active last week yet still hampered by the elevated interest rate environment. The market rate locked $415 million last week, falling below the $530 million four-week moving average. Traders have reported that investor interest remains well intact for Agency CMBS paper with the supply shortage helping aid investor appetite. Agency CMBS investor spreads were mostly unchanged over the week. While Fannie issuance has slowed in the face of rising Treasury yields, Freddie Mac on the other hand had a very busy week as it issued $1.1 billion in Participation Certificates (PC), around a 30% increase from the previous week. This paces slightly ahead of their roughly $3 billion average monthly cadence so far this year. Separately, they also priced a 7-Yr Floating Rate K-Deal of $878 million called K-F172. In the broader credit markets, investment-grade corporate issuance was robust at $52 billion for the week, exceeding dealer expectations. Similar to Agency CMBS spreads, Bloomberg Single-A 10-year and CDX IG 5-year indices’ spreads were virtually flat over the week.

The week ahead: The week ahead is expected to be relatively quiet on the data front, though two forces will keep markets on edge. With Kevin Warsh now at the helm of the Federal Reserve following Jerome Powell’s departure as chair and assuming Stephen Miran’s seat as governor, markets will be closely watching Warsh’s early communications for any signals on the policy path, particularly given the current inflation environment and the sharp repricing of rate hike expectations last week. The release of the April 29^th FOMC meeting minutes on Wednesday will also be scrutinized for the degree to which officials were already debating a potential hike versus hold. On the geopolitical front, any progress (or lack thereof) on reopening the Strait of Hormuz will remain the dominant market driver, with oil prices and Treasury yields highly sensitive to headline risk. Yesterday, President Trump announced on Truth Social that he had called off a military strike on Iran that had been planned for Tuesday, citing “serious negotiations” underway and heeding requests from the leaders of Saudi Arabia, Qatar, and the UAE to allow more time for diplomacy. While the announcement offered a near-term reprieve, Trump ordered the military to remain ready “on a moment’s notice,” leaving the ceasefire’s durability very much in question. On the data side, May preliminary Manufacturing and Services PMIs on Thursday and the final University of Michigan Sentiment and Inflation expectations readings on Friday will offer a read on whether consumers and businesses are beginning to feel the weight of elevated energy costs and tightening financial conditions. In the Agency CMBS markets, Freddie Mac is slated to issue $845 million PCs along with pricing their $855 million 5-Yr K-562 deal. Syndicate desks are expecting $40 billion of investment-grade corporate paper to price this week. Lastly, bond markets will have an early close this Friday and will be closed next Monday in observance of the Memorial Day holiday with traders communicating that liquidity will likely start to thin out towards the back half of the week.

Economic Calendar: (Week of 05.18.2026 – 05.22.2026):

05/20: Wednesday

• Apr 29^th: FOMC Meeting Minutes
• S. Treasury Auction: $16 billion 20-year bonds

05/21: Thursday

• Week of May 16^th: Initial Jobless Claims (Est. 210K, Prev. 211K)
• Week of May 9^th: Continuing Claims (Est. 1,785K, Prev. 1,782K)
• May Preliminary: S&P Global U.S. Manufacturing PMI (Est. 53.6, Prev. 54.5)
• May Preliminary: S&P Global U.S. Services PMI (Est. 53.6, Prev. 54.5)

05/22: Friday

• May Final: U. of Mich. Sentiment (Est. 48.2, Prev. 48.2)
• May Final: U. of Mich. 1 Yr Inflation (Prev. 4.5%)