Resilient markets, stubborn rates: inflation remains the real issue
30 APR, 2026
Jeffrey Cleveland, Chief Economist at Payden & Rygel
In recent weeks, a geopolitical crisis and an oil price shock have generated market volatility, but with limited lasting effects: equity markets have quickly rebounded, as shown by the S&P 500 recovery, and credit spreads have narrowed from their peaks. In contrast, global interest rates remain elevated compared to late March, and bond markets continue to price in a restrictive stance from central banks.
On the macroeconomic front, the latest revisions point to a more resilient labor market than previously expected: the projected U.S. unemployment rate stands at 4.3% (down from 4.6%), reflecting near-zero labor force growth. This implies that even **very modest job creation—around 10,000 jobs per month in 2026—**could be sufficient to keep the unemployment rate stable, downplaying signs of weakness seen in more volatile monthly data. In this context, our recession estimates have been revised downward from 30% to 20%, although they remain above the historical average of 10%, given ongoing risks in the labor market.
On inflation, our forecasts have been slightly revised upward, not so much due to oil but rather because of persistent pressures linked to tariffs. Core PCE inflation is expected to hover around 3% during the summer, before declining to 2.4% by December 2026, supported by gradual disinflation in services and moderating wage growth. At the same time, a scenario is emerging in which productivity growth could play a more central role, although long-term prospects remain uncertain in the context of weak employment dynamics. Within this framework, expectations for monetary easing in the United States are confirmed, with three rate cuts anticipated over the next 12 months, albeit with delayed timing: two cuts expected in the fourth quarter of 2026 and one at the beginning of 2027. Yields on 10-year Treasuries are projected to decline over the medium term, while remaining stable in the short term due to still-elevated inflation and a cautious Fed.
Outside the United States, market expectations appear less convincing, particularly in Europe, Canada, and the United Kingdom. In the UK, deteriorating labor market conditions—with average job losses over the past eight months—suggest that weak growth may outweigh inflationary pressures, calling into question current rate expectations.
Overall, in a baseline scenario of gradual disinflation, credit continues to offer favorable prospects, supported by tight spreads and high starting yields. Recent macroeconomic revisions, while significant, do not materially alter the overall outlook for interest rates and credit.
