The Weekly Look at the Global Economy and Markets

Mohamed A. El-Erian

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The Weekly Look at the Global Economy and Markets<br>Mohamed A. El-Erian<br>May 23, 2026

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The Context<br>Last week offered a collective sigh of relief for investors and economists. Important parts of the global economy and markets edged away from the flashing warning signs that had dominated previous weeks and were amplified in the first half of the week. That’s the good news. Yet, escaping immediate risks is not the same as securing sustained safe passage. The outlook remains decidedly uncertain, caught in a tug-of-war between profound technological shifts and stubborn macroeconomic and geo-economic realities.<br>Thanks for reading! Subscribe for free to receive new posts and support my work.

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By the end of the week, markets were characterized by virtually across-the-board gains. US equities marched higher to new records, European indices ended near their recent peaks, and Asian markets also rallied as the optimism surrounding artificial intelligence broadened well beyond a narrow set of technology names. Meanwhile, yields fell, and credit spreads narrowed. All this occurred as oil ended the week lower in volatile trading, and the dollar strengthened.<br>It would have been easy for markets to succumb to anxiety. We are navigating a complex economic landscape as consumer price inflation continues to challenge policymakers, and the risk of demand destruction is too real to ignore. The UK is going through a period of pronounced uncertainty; the Strait of Hormuz remains closed for now as negotiations continue, and some countries are already curbing energy demand in the face of possible physical shortages.<br>Just a few months ago, the consensus had priced in two rate cuts for 2026 by the Federal Reserve, the world’s most influential and powerful central bank. Last week, however, the futures market shifted firmly toward pricing in a rate hike by year-end amid a broader recalibration to a world of “higher-for-longer” inflation, rates, deficits, and structural shifts.<br>In a typical cycle, such a hawkish repricing would likely have triggered a tantrum in equities and a spike in sovereign bond yields. Instead, the market response has been impressively resilient, with investors betting heavily on the enormous promise of AI and strong earnings. This has also allowed the markets to largely sidestep the content of the latest Fed minutes, which pointed to greater concerns about inflation—and, with that, more support for a two-sided characterization of policy options—than had been suggested at the press conference following the late-April meeting.<br>However, beneath the surface of this week’s eventually calmer markets, the divide between Main Street and Wall Street grew. Capital markets are celebrating strong corporate earnings and a massive IPO pipeline, but household sentiment tells a different story: consumer confidence is at a new record low, and inflationary expectations are rising. This “soft” data continues to stand in stark contrast to the “hard” data, which this week included solid production and continuously low jobless claims. So far, what households say has not translated into what they do.<br>Away from the US, the Japanese economy had a particularly good week. GDP figures and exports surprised to the upside, and inflation was softer than the consensus forecast. In the UK, however, the economic picture remained delicate, notwithstanding better-than-expected inflation data (particularly in services). The April fiscal data highlighted the challenge as government borrowing exceeded the consensus forecast despite higher tax collection. This occurred as concerns mounted about a weakening labor market.<br>On the earnings front, an overall favorable picture was accentuated by Nvidia’s quarterly earnings—the company reported a larger-than-expected $81.6 billion in fiscal Q1 revenue (up 85% year-over-year) and announced a 25-fold dividend increase and an $80 billion buyback. The company intends to return 50% of its free cash flow to investors this year. This comes as markets anticipate a large IPO pipeline, including SpaceX.<br>The Week Ahead<br>Looking to the week ahead, the focus is on whether this newfound market stability is durable or merely a pause in a wider regime of economic and financial volatility. To this end, we will be closely monitoring the sovereign bond market’s ongoing digestion of Fed news under its new chair, Kevin Warsh, who was officially sworn in at the White House on Friday, emphasizing his “reform-oriented” vision and securing supportive words from President Trump, including on Fed independence.<br>It’s also important to keep an eye on the European Central Bank, the Bank of England, and the Bank of Japan. All face their own delicate balancing acts, be it growth versus inflation, currency pressures, or jittery bond markets. The global alignment of central bank policy is fracturing, creating fertile ground for...