WEEK ENDING 5/8/2026
- Labor markets hold, but the consumer story is splitting
- The Strait, the ceasefire, and what comes next for rates
- Geopolitical complexity, and AI tailwinds
A CITY DIFFERENT TAKE
April payrolls rose 115,000, marking back-to-back months of job gains of more than 100,000 for the first time since last spring. The headline number was solid, and the unemployment rate held at 4.3%, below recent highs. Encouragingly, continuing claims have been grinding lower, suggesting the labor market is not deteriorating beneath the surface. The Federal Reserve will likely read this report as removing urgency to cut rates, reinforcing a neutral-to-cautious posture heading into the June meeting.
Yet the consumer picture is more complicated than the payroll number implies. The University of Michigan Consumer Sentiment Index fell to a record low in May, and year-ahead inflation expectations jumped to 4.5%. Comments from Kraft Heinz, McDonald's, and Whirlpool this week flagged real affordability stress, particularly among lower- and middle-income households who are absorbing sharply higher gasoline prices. Retail sales for April are expected to slow meaningfully, consistent with the pattern seen in 2022 when gas price spikes hit spending with a one-month lag. The divergence between “hard” data strength and “soft” data anxiety bears close watching.
Oil prices pulled back sharply this week on reports that the U.S. and Iran are weighing a deal that could lead to a partial reopening of the Strait of Hormuz. A tenuous ceasefire appears to be holding, and equity markets hit new highs in response. But the bond market is pricing a more cautious path, citing diminishing odds of Fed easing as three regional Fed presidents dissented at the last FOMC meeting, signaling a possible shift to a neutral policy bias in June.
For fixed-income investors, the operative question is whether this is a durable repricing of the rate path or a conflict-driven overshoot that reverses as energy prices normalize.
For now, the case for stagflation in the U.S. is unlikely given America’s status as a net energy exporter, a structurally different position than the 1970s. The more likely outcome is a prolonged pause, with the Fed holding rates while watching April CPI, which is expected to show core inflation edging up to 2.7% year over year. At CDI, we think in this environment, short and limited-duration strategies benefit.
President Trump's upcoming visit to Beijing May 14–15 introduces another variable into an already complex macro backdrop. The agenda spans trade, technology, Taiwan, and Hormuz — and the risk of a fragile, inconclusive outcome is real. Meanwhile, the AI investment cycle continues to accelerate, with S&P 500 companies in Information Technology and Communications Services accounting for over 50% of first-quarter earnings growth. Planned corporate AI capex is projected at $695–725 billion in 2026, a figure that reinforces the underlying growth narrative even as consumers face pressure.
CHANGES IN RATES
TreasuryMarket
Treasury yields moved mostly lower throughout the week. The 2/10 spread narrowed from 49 basis points to approximately 47 basis points this week.
Municipal Market
AAA general obligation municipal bond yields were marginally lower on the week. The 2/10 spread remained the same from last week at 52 basis points.
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
The muni/Treasury ratios are through the current breakeven rate of 67% (highest marginal tax rate). Ratios did not move too much last week.
Investment Grade Corporates
IG Corporate yield drifted lower last week as well. The 2/10 spread is 91 basis points.
THIS WEEK IN WASHINGTON
The U.S. Court of International Trade delivered a 2-1 ruling finding that the Trump administration lacked sufficient justification to impose 10% across-the-board global tariffs under Section 122 of the 1974 Trade Act. This is the second major judicial setback this year for the administration's tariff program, following the Supreme Court's earlier invalidation of the IEEPA tariffs. The ruling's immediate market impact is limited, as relief was granted only to specific plaintiffs; the tariffs remain in place for all other importers while an appeal plays out, and the Section 122 tariffs are set to expire in July regardless. However, the legal uncertainty around the administration's tariff authority is growing, and the prospect of eventual refunds adds a meaningful fiscal wildcard.
Simultaneous with the court ruling, President Trump threatened significantly higher tariffs on the European Union if a trade agreement is not ratified by July 4. This renewed trade war rhetoric introduces another layer of uncertainty for global growth and supply chains at a moment when markets had been hoping for de-escalation on multiple fronts.
CBO projects the federal budget deficit at $1.9 trillion in fiscal year 2026, with federal debt on a path to 120% of GDP by 2036. Fiscal policy added approximately 0.8 percentage points to first-quarter GDP growth, driven largely by the OBBBA tax cuts, though Brookings projects fiscal policy will turn modestly restrictive over the remainder of 2026 as the initial stimulus effect fades. For municipal bond investors specifically, the SALT deduction cap increase embedded in OBBBA has meaningful implications for after-tax demand dynamics in high-tax states like Massachusetts, New York, and California.
With Congress in recess, political focus shifted to the midterm primaries, with Indiana and Ohio holding contests this week as the electoral season heats up. A midterm outcome that produces legislative gridlock would likely limit further fiscal policy action and reduce the probability of additional tax or spending legislation — a stabilizing scenario for Treasury supply dynamics.
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of May 8 at 2.62%, 7 basis points lower than last week. The graph above contrasts a 5-year Breakeven Inflation Rate tracked weekly. This is the market-implied inflation rate. We track this relative to core PCE, the Fed’s favorite inflation measure. The 10-year Breakeven Inflation Rate finished the period at 2.45%, 3 basis points higher than last week.
MUNICIPAL CREDIT
Last week's 10-year quality credit spread between BBB revenue bonds and AAA general obligation bonds was 0.82%, unchanged week over week. The historical average credit spread is 1.68%.
TAXABLE CREDIT
Investment-grade spreads for the past week were at 97 basis points, 3 basis points lower from the previous week. The long-term average for investment grade is 1.56%. High-yield credit spreads are 2.62%, 1 basis point higher than last week.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Money market fund flows were positive across every single category. There is $7.7 trillion sitting in money market funds, which remains a significant opportunity.
Mutual Fund Flows (millions of dollars)
Mutual fund flows were negative overall, except in the positive high-yield category.
ETF Fund Flows (millions of dollars)
Net ETF flows reversed week over week with taxable flows in positive territory and municipals in the negative
SUPPLY OF NEW ISSUE BONDS
Supply continues to dominate the muni market. The tax-exempt calendar is projected at $1.3 billion this week.
CONCLUSION
Markets ended the week on a cautiously constructive note, but the underlying policy signals warrant close attention. April payrolls held firm and ceasefire headlines provided temporary relief on oil, yet the Treasury curve's bear-flattening dynamic, front-end yields rising while the long end rallied, reflects a market increasingly convinced the Fed stays on hold well into the second half of the year. Two consecutive court defeats for the administration's broad tariff authorities have not resolved trade policy uncertainty; they have simply pushed the timeline into the appellate courts while the July 4 EU deadline and the Beijing summit add fresh variables to an already complex summer.
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