Economic and Market Overview
July 2026
Equities held steady despite a sharp decline in high-flying tech names, Treasury yields jumped, oil soared as volatility reigned over a month in which a resolution to the Middle East conflict appeared as elusive as ever, and Kevin Warsh’s FOMC held their second policy meeting. Credit spreads widened again as heavy new IG issuance persisted.
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The S&P 500 navigated a treacherous path that ultimately brought it back to its starting point, though the index was bailed out by its non-tech constituents as the NASDAQ 100 fell by over 6.5%. The Philadelphia Stock Exchange Semiconductor Index declined 20% after doubling in the first half of the year. It was a sharp momentum reversal that led to the downfall of a highly leveraged hedge fund. In Treasuries, the yield curve steepened as higher oil prices renewed inflation fears and markets reacted unfavorably to Kevin Warsh’s second press conference as Fed Chairman (see below). Credit spreads widened, again led by the long end, as supply remained very heavy. J.P. Morgan reported $141 billion in IG issuance, 45% above the average for the trailing four Julys. High-yield issuance, by contrast, was just $18 billion, a 15-month low. With no end to the Middle East conflict in sight, WTI soared to finish the month 21.8% higher. Despite higher Treasury rates, the Dollar Index fell 1.3%, while gold rose 0.9%.
Economic Data
Labor market data continued to imply that the U.S. economy remains in a low-hire, low-fire state. Nonfarm payrolls grew at a 57k pace in June, barely half of the 113k consensus, and the prior two months were revised down by a net 74k. The unemployment rate dropped 0.1%, but the participation rate dropped by 0.3% to 61.5%. Even though payroll growth slowed for the fourth consecutive month, the 92k average over the first six months of 2026 comfortably exceeds the 27k average over the same period last year. For July, forecasters currently expect an uptick to an 85k pace in nonfarm payrolls and no change in the U-3 rate when data are released on August 7. The pace of retail sales slowed in June, to 0.2% MoM, but May’s figure was revised higher to 1.0%. Consumer sentiment indices varied, as the Conference Board’s weakened in July, while the University of Michigan’s more inflation-sensitive survey improved. Housing releases were mixed, as existing and new home sales missed forecasts, while housing starts surprised with a 19.0% increase. Even though manufacturing hard data releases generally disappointed, the New York and Philadelphia Fed’s regional surveys were much stronger than expected. As for services, S&P Global’s U.S. PMI improved for the second straight month. U.S. GDP growth slowed from Q1’s 2.1% print with a 1.5% pace in Q2, according to the advance release. Inventory decumulation and net trade weighed on the figure, however, as personal consumption rebounded strongly from a soft Q1 (+0.5%) to 3.2% (vs. consensus 2.3%).
Inflation
June inflation data were broadly welcomed by markets as releases were cooler than expected. Headline CPI’s -0.4% MoM and 3.5% YoY rates were both 0.3% lower than surveys. The core readings (0.0% MoM and 2.6% YoY) were 0.2% below consensus. PPI numbers were also softer than estimates across the board and May’s results were revised down. Headline PCE fell at a 0.1% MoM pace, as expected, while the core index came in 0.1% under forecasts at a 0.1% pace. Nonetheless, with oil ending the month much higher, inflation expectations followed suit. The 2-year breakeven rose 20 bps to 2.20%, while the 30-year break rose by a more modest 7 bps to 2.24%.
Federal Reserve
The FOMC left their policy rate unchanged at the July meeting. Interest rate markets were pricing 35-40% odds of a hike on the two days before the meeting, the highest degree of uncertainty since 2003. The decision to hold was a dovish surprise relative to those expectations, but the dovishness was tempered by three hawkish dissents. Chairman Warsh delivered another evasive press conference characterized by a series of non-answers to perfectly reasonable questions. Markets judged his lack of candor harshly on the day of the meeting, with a bear steepening in the Treasury yield curve, a decline in risk asset prices, and a depreciation of the dollar. As the month closed, markets were pricing a 75% chance of a hike at the September meeting. We maintain our view that the Fed will remain on hold through the end of the year.
Sources: Bloomberg Index Services Ltd., Bloomberg.
This overview is for informational purposes only. The information has been obtained from sources considered to be reliable, but the accuracy and completeness are not guaranteed. There is no assurance that any economic trends mentioned will continue or that any forecasts will occur. Economic data are as of the dates noted.
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