The quarterly review for Q2 2026

US equities delivered their strongest quarter of the year so far, reversing the decline of the first quarter. The broad US benchmark rose +14.9%¹ over the quarter, and the Nasdaq Composite rose +21.4%². Both indices ended the first quarter below where they began the year, and the second quarter more than recovered that ground: the year-to-date gains stand at +9.6%³ and +12.8%⁴ respectively. Levels at the end of June were 7,499.36⁵ for the broad benchmark and 26,213.72⁶ for the Nasdaq.

The gain was front-loaded within the quarter. The broad benchmark reached 7,580.06⁷ at the end of May, close to its fifty-two week high of 7,609.78⁸, and the Nasdaq reached 26,972.62⁹ against a high of 27,093.90¹⁰. June then gave some of it back, with the broad benchmark down -1.1%¹¹ on the month and the Nasdaq down -2.8%¹². The month ended with a recovery: in the final week the broad benchmark rose +1.8%¹³ and the Nasdaq rose +2.4%¹⁴. Measured against the fifty-two week low of 6,299.19¹⁵, the index sits far nearer the top of its range than the bottom.

The June pause looks like consolidation rather than the end of the advance, given that both indices closed the month recovering. The observable that settles it is whether the indices take out their fifty-two week highs in the third quarter: a break above confirms the advance continued, while a failure to regain the May levels would mark the second quarter as the peak. Rising real yields are the condition most likely to cap further gains, because equity valuations expanded while nominal and real yields were also rising.

Policy did not move with prices. The Committee chose to "maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent"¹⁶, leaving the stance of the second quarter unchanged from the setting carried into it, and it did so without dissent, "approved the following statement for release by a 12 – 0 vote"¹⁷. A quarter in which price pressure built and long yields rose therefore ended with no offsetting move in the policy rate, so real policy tightness eased rather than increased.

The statement grounds the hold in activity rather than in any judgement that price pressure had passed. Activity was described as "expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East"¹⁸, with "Job gains have kept pace with the workforce, and the unemployment rate has changed little"¹⁸. On prices the language was unambiguous: "Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy"¹⁹, followed by the commitment that "The Committee will deliver price stability"¹⁹. The supply framing explains why an inflation overshoot did not force action, and the commitment sentence is the part that binds if the overshoot persists. Official communication elsewhere in the quarter addressed small business credit and the international role of the dollar rather than the near-term rate path, so the June statement is the whole of the quarter's policy signal.

If the price data of the coming quarter continue to run above the stated goal, the burden of that commitment sentence points to a firmer stance rather than a further hold. If instead energy and other supply-driven components stop adding to the price measures, the current setting can persist while the labour market stays as described. A weakening in job gains would resolve the same tension in the opposite direction.

The quarter tightened the curve from the front end rather than the back. The two-year rose to 4.14%²⁰, a gain of +35bp²¹ over the quarter and +67bp²² over the year to date, leaving it close to its twelve-month peak of 4.24%²³. The ten-year rose by less, +14bp²⁴ over the quarter to 4.44%²⁵, and the thirty-year barely moved, +3bp²⁶ to 4.91%²⁷. The gap between two- and ten-year yields narrowed by -21bp²⁸ over the quarter to 0.30%²⁹, continuing rather than interrupting a flattening that has run -41bp³⁰ since December and now sits near the twelve-month low of 0.27%³¹.

The move was real, not inflationary. Ten-year real yields rose +20bp³² over the quarter to 2.20%³³ and +27bp³⁴ year to date, touching the twelve-month high of 2.29%³⁵ in late June before easing. Ten-year breakevens fell -6bp³⁶ over the quarter to 2.24%³⁷ and are effectively flat on the year at -1bp³⁸. Policy itself did not move: the upper bound of the federal funds target held at 3.75%³⁹ through the quarter and the year to date, well below the twelve-month high of 4.50%⁴⁰. With the policy rate fixed, the front-end repricing came from the market pulling expected easing further out.

Further flattening is likely so long as the front end keeps repricing while policy stays on hold. The condition to watch is the breakeven: if it turns higher alongside real yields, the rise in nominal yields becomes an inflation story rather than a policy-path one, and the long end is the part that gives way. A cut in the policy rate would relieve the two-year first and steepen the curve from the front.

Credit spreads tightened through the second quarter, in the same direction as emerging market spreads rather than against them. Investment grade spreads ended June at 0.76%⁴¹, down 14bp⁴² on the quarter and 3bp⁴³ on the year, close to the 0.73%⁴⁴ low of the past year and well below the 0.94%⁴⁵ high. High yield spreads finished at 2.75%⁴⁶, down 53bp⁴⁷ over the quarter after the March level of 3.28%⁴⁸. The quarter reversed the widening carried into the end of March and returned both markets to the tighter end of their twelve-month ranges.

Total returns followed the spread move. The investment grade total return index rose +1.4%⁴⁹ over the quarter and +1.0%⁵⁰ over the year, ending at 3,623.16⁵¹. High yield rose +2.5%⁵² over the quarter and +1.9%⁵³ on the year, closing at 1,902.38⁵⁴, within reach of its twelve-month high of 1,903.20⁵⁵. June itself added little: investment grade spreads widened 2bp⁵⁶ and high yield 1bp⁵⁷ on the month, so the quarter's tightening was done by May.

Spreads this close to their twelve-month lows leave little room to absorb a rise in real yields without price loss. If growth stays positive while inflation pressure persists, credit is likely to hold its ground and carry, rather than spread compression, will drive returns. A renewed widening at the high yield end would be the first sign that the overheating regime is turning into a credit problem.

Crude reversed hard in the second quarter after the first-quarter spike. Brent ended June at 70.46⁵⁸ dollars a barrel, down 56.23⁵⁹ over the quarter and down 22.42⁶⁰ in June alone; West Texas Intermediate fell 32.30⁶¹ over the same quarter to 70.56⁶². The reversal is a retreat from an extreme, not a return to cheap energy: both grades are still higher than at the end of last year, Brent by 9.11⁶³ dollars and WTI by 13.30⁶⁴, and the fifty-two week high of 138.21⁶⁵ was set inside this cycle. The inflation impulse now running through headline measures was priced when Brent stood at 126.69⁶⁶ at the end of March, and pass-through arrives after the price move.

The dollar firmed against advanced economies while the broad measure did not. The advanced-foreign-economies index rose +1.1%⁶⁷ over the quarter and +2.6%⁶⁸ in June to 114.2259⁶⁹, close to its fifty-two week high of 114.67⁷⁰; the broad index was -0.1%⁷¹ over the quarter.

Headline inflation is likely to decelerate in the coming quarter if crude holds near its June level, while core pressure persists. A renewed climb back toward the spring peak would restore the headline impulse rather than end it.

Price pressure built through the quarter on both core and headline measures. Core PCE rose to 130.34⁷², up +1.00⁷³ over the quarter and +2.45⁷⁴ over the year to date, a gain of +0.8%⁷⁵ in the quarter alone; the June reading was also the highest of the past year at 130.34⁷⁶. Headline CPI advanced +2.28⁷⁷ over the quarter and +6.54⁷⁸ year to date, or +2.0%⁷⁹, and eased only in the final month, by -1.41⁸⁰. That single monthly dip interrupted, but did not reverse, a run of rising prices that has held all year.

Growth was slightly positive and no more. The nowcast for the second quarter stood at 1.54%⁸¹, up +0.30pp⁸² on the first quarter but down -2.70pp⁸³ from the fourth quarter of last year. Labour data stayed firm: payrolls added +242⁸⁴ thousand over the quarter to 158,892⁸⁵ thousand, and unemployment fell to 4.20%⁸⁶, the low of the past year. Consumer sentiment sits against that: it ended the quarter at 49.50⁸⁷, down -3.80⁸⁸ on the quarter despite a monthly gain of +4.70⁸⁹.

Inflation pressure is likely to keep dominating the macro picture into the third quarter unless core PCE posts consecutive monthly declines rather than a single soft headline month. A payroll gain that slows toward zero alongside a rising unemployment rate would mark the turn from momentum to exhaustion, and neither condition held in the second quarter.

Gilt yields fell across the curve in the second quarter, interrupting but not reversing the year's rise. The five-year fell 0.16pp⁹⁰, the ten-year 0.12pp⁹¹ and the twenty-year 0.07pp⁹², leaving all three above their end-of-year levels, the ten-year higher by 28bp⁹³. Bank Rate was unchanged at 3.75%⁹⁴ and overnight rates did not move. Sterling ended the quarter slightly firmer at 1.3259⁹⁵, still below its level at the start of the year.

Growth held positive, with real output up +0.4%⁹⁶ on the quarter and +1.0%⁹⁷ over the year, and unemployment steady at 4.90%⁹⁸. The Bank's June speech placed the inflation problem outside the policy rate, noting that "inflation is often driven by forces beyond the reach of monetary policy"⁹⁹ and that "fossil fuel supply chains will continue to be disrupted and reshaped by geopolitical tensions"¹⁰⁰.

If domestic pay and pricing behaviour stay contained, the Bank is likely to hold rather than respond to energy-driven price moves; evidence of second-round effects in wages would point the other way.

The euro area added to the quarter's inflation pressure while its bond market moved the other way. Consumer prices rose +1.0%¹⁰¹ over the quarter and +2.4%¹⁰² over the year, leaving the index at 103.00¹⁰³, its highest of the past year. Growth stayed slightly positive, with output up +0.6%¹⁰⁴ on the quarter. Yields at both ends fell rather than rose: the ten-year ended at 2.92%¹⁰⁵, down 15bp¹⁰⁶ on the quarter, and the two-year at 2.48%¹⁰⁷, down 11bp¹⁰⁸ though still +37bp¹⁰⁹ higher on the year.

The policy rate did the tightening instead, lifted 25bp¹¹⁰ in the quarter to 2.25%¹¹¹, its highest of the past year. Credit and currency reinforced the risk-on tone: high yield spreads narrowed -0.67pp¹¹² to 2.70%¹¹³, unchanged on the year, while the euro slipped to 1.1417¹¹⁴.

Long-end euro yields are likely to stay below their quarterly starting point unless price growth reaccelerates from its current pace. A further policy step would confirm that the inflation impulse, not the bond market, is setting the region's direction.

Japanese equities carried the quarter. The Nikkei ended at 70,062.32¹¹⁵, a gain of +37.2%¹¹⁶ over the quarter and +39.2%¹¹⁷ over the year to date, so the quarter accounted for nearly all of the annual advance rather than interrupting it. The long end rose with it: the ten-year yield added +32bp¹¹⁸ over the quarter to 2.69%¹¹⁹ and the thirty-year +23bp¹²⁰ to 3.87%¹²¹, while the two-year was close to flat at +1bp¹²². The yen weakened to 162.61¹²³ per dollar, its fifty-two week high 162.61¹²⁴.

Policy tightened into this. The Bank of Japan raised the overnight rate, describing the guideline as "remain at around 1.0 percent"¹²⁵ and citing "a risk of underlying CPI inflation deviating upward to a level above the price stability target"¹²⁶. Bond purchases continue to shrink on the schedule set out in the June meeting. Output grew +0.4%¹²⁷ on the quarter, and unemployment was 2.50%¹²⁸.

Further yen weakness would sustain the imported cost pressure the Bank has named, and a durable turn in the currency is the condition under which long-end yields stop rising. If underlying inflation moves clearly above target, the pace of policy adjustment is likely to quicken.

Canada cut against the quarter's global pattern of rising yields. The ten-year fell to 3.38%¹²⁹, down 8bp¹³⁰ over the quarter and 4bp¹³¹ on the year, while the two-year fell to 2.74%¹³², down 8bp¹³³ over the quarter but still up 16bp¹³⁴ year to date. The Canadian dollar weakened, with the rate rising to 1.4205¹³⁵ per US dollar, up 0.0252¹³⁶ over the quarter and close to the twelve-month high of 1.4237¹³⁷.

Policy did not move: the Bank of Canada held its target "at 2.25%"¹³⁸ and pointed to a domestic economy where "business investment remained weak"¹³⁹. Real output nonetheless rose +0.8%¹⁴⁰ on the quarter, and unemployment fell to 6.50%¹⁴¹, down 20bp¹⁴². Energy prices carried the inflation impulse, with the Bank noting oil "roughly $10 a barrel above our April MPR assumptions"¹⁴³.

If oil prices retrace, Canadian headline inflation is likely to ease and the case for holding rates weakens. A further slide in the currency would work the other way, sustaining imported price pressure into the second half.

Emerging market credit tightened through the quarter, in line with the compression seen in developed-market spreads. Corporate spreads ended at 1.46%¹⁴⁴ after -0.35pp¹⁴⁵ over the quarter, and high yield at 3.11%¹⁴⁶ after -0.78pp¹⁴⁷, both leaving the year-to-date moves negative at -0.10pp¹⁴⁸ and -0.34pp¹⁴⁹. Currencies did not follow the same path. The broad emerging market dollar index fell -1.2%¹⁵⁰ over the quarter but rose +0.9%¹⁵¹ in June, with the won weaker by +25.28¹⁵² against the dollar over the quarter and the rupee by +0.830¹⁵³. Equity volatility stayed extreme, at 36.73¹⁵⁴ and higher on the year by +112.3%¹⁵⁵.

Spread compression alongside elevated volatility is unlikely to persist if Asian currencies keep weakening at June's pace. A further rise in the broad dollar index would point to renewed spread widening, while a return to the quarter's earlier softening would confirm the tightening.

Federal financing was the visible policy lever of the quarter, and the borrowing plan published in the second quarter framed it. The Treasury set out its funding needs for the current and following quarters, stating that the "Department of the Treasury today announced its current estimates of privately-held net marketable borrowing"¹⁵⁶. The published table shows the current estimate for the April-to-June quarter above the prior estimate, and the estimate for the following quarter unchanged from the prior one, so the increment sits in the quarter under review rather than in the run that follows.

The mechanics limit how much of that increase reaches the market. The Treasury noted that "buybacks are not expected to significantly affect privately-held net marketable borrowing as new issuance replaces securities that are bought back"¹⁵⁷, leaving the increase in the current quarter's estimate as the operative change in supply.

If the following quarter's estimate is revised upward at the next refunding, supply will reinforce the upward pressure on nominal and real yields rather than offset it. If it holds unchanged, the fiscal impulse to yields is likely to fade while price pressure remains the dominant force.

The quarter was classified as overheating, and the classification carried no prior run behind it, so the label begins its own history rather than extending one. Price pressure dominated the reading, while growth contributed only a slightly positive push. The nearest alternative states, contraction and stagflation, each drew far less weight than overheating, and goldilocks drew least of all. Nothing in the quarter interrupted the direction set earlier in the year; the period continued it.

The drivers sit on the inflation side. The persistence of price pressure across core and headline measures, together with rising real and nominal yields in the United States and at the long end in Japan, is what pushed the classification away from the benign states. Growth held its footing without accelerating, so the regime was not a growth story.

The transition weights point overwhelmingly at the same state persisting into the next quarter, and the burden of proof now sits with anyone expecting a break. The observable that would settle it is the inflation measure itself: a sustained deceleration in core prices would move the reading toward goldilocks, while a stall in growth alongside firm prices would move it toward stagflation.