By Douglas Porter

May 22, 2026

Well, we’re not sure if this is the end of the conflict with Iran, and we’re definitely not sure that this ends well. But equity markets are in no mood for such trifling details, not with the tidal wave of spending on AI rolling on, with corporate earnings still blazing, and with the prospect of a handful of massive IPOs in coming months.

Even the global back-up in bond yields only slowed the rapid market ascent for a few days but barely caused it to break stride—the S&P 500 is now sitting on an eight-week winning streak. Since bottoming in late March, the index has powered up more than 17%, while the Nasdaq has popped 26%.

To be clear, that’s in the space of just 37 trading days; the only two stronger such stretches in the past 20 years were bounces off extreme lows in 2009 and 2020. Even the Dow managed to rebound above 50,000, hitting a new record high for the first time since early February.

Adding some fuel to the fire were unconfirmed reports that the U.S. and Iran were close to an agreement. (We won’t trouble the raging bulls with the small matter that we have heard that before, perhaps seven or eight times, and doubts resurfaced Friday.)

That slim thread was still enough to clip oil prices by almost $8 for the week to around $97, and calm bonds. The 30-year U.S. Treasury yield had closed at 5.18% on Tuesday, its highest since June 2007, or just before the Great Financial Crisis first broke wide open. At Tuesday’s peak, 10-year yields topped 4.67%, or up 70 bps from the pre-war low. Both of these bellwether yields slipped about 10 bps from the high by week’s end, tempering some of the rising global anxiety, but far from erasing the bigger picture.

Even with some slight moderation in oil prices and bond yields, the market is more firmly leaning to the view that the Fed’s next move is likely to be a rate hike, not a cut. The relentless rally in equities, signs of firming job growth, and surprisingly hawkish Minutes from the April FOMC all added to the mix.

This presents Fed Chair Kevin Warsh with a rather inconvenient truth—if he is still advocating for rate cuts, as in his Senate testimony last month, he may be a lonesome dove. The case for cuts simply is not there at the moment, and there are likely precious few Fed voters who would even consider such a step at this point.

Governor Waller put an exclamation point on the shift in view among Fed members in a speech Friday morning. The erstwhile dove flatly stated that the easing bias should be removed from the Fed’s statement and that he preferred no change in policy rates in the near term, presumably until there was more clarity on the oil price and inflation outlook.

While he said that he wasn’t advocating for a hike, yet, he wouldn’t hesitate to if “expectations became unanchored”. His key concern is that inflation expectations could indeed ramp up as the Fed is now in the process of missing its inflation target for a sixth year.

As if to amplify those remarks, the University of Michigan reported at the same moment that consumer inflation expectations took a big step up in May. The one-year outlook ticked up to 4.8%, while the five-year view jumped almost half a point to 3.9%.

Aside from a flare-up last spring around Liberation Day, that’s the highest reading on this measure in more than 30 years—even during the big inflation bulge in 2021/22, it barely got above 3%. As Waller noted, it’s the fact that relatively high inflation has persisted this long that has got consumers re-thinking their longer-term view on inflation, and that’s bad news for the Fed doves.

However, before reading too much into the UofM survey, we would note that it also reported that household sentiment tanked in May to 44.8. That’s the lowest level in more than 70 years of this survey; lower than during the harsh recessions in 1982 and 2009, or during various wars, the tech bust and 9/11, and during the pandemic.

Seriously? Clearly, the sentiment surveys are also taking on much more of a political bent in recent years, and that could also be the case even for the inflation opinion. The reality is that spending is still hanging in there, despite the ostensibly dark consumer mood. Recall that retail sales were up 0.5% m/m as recently as April, leaving them almost 5% above year-ago levels, still comfortably north of inflation trends.

At the same time, initial jobless claims are hovering around 200,000 and the ADP’s weekly jobs reading is steadily improving and consistent with more payroll gains above 100,000 per month. As Waller suggested, the job market is no longer his “chief concern” when setting policy, and consumer spending hasn’t been dissuaded by higher oil prices.

It’s that very resiliency in spending that further reduces the chances of a near-term Fed cut and emboldens the hawks. The near-total lack of support for rate cuts—Waller went so far as to say it would be “crazy” to talk about cuts now—is just one of the many issues that Warsh will be dealing with in his first FOMC meeting in mid-June.

But we’ll just conclude by noting that stepping in as Chair at a time of rollicking equity markets, a firming job backdrop, steady consumer spending, but slightly above-target inflation is a lot more enviable than dealing with flailing stocks, high unemployment, and too-low inflation.

No one is ever going to say that Canada’s inflation is too low, but the latest CPI for April did provide a surprising—and welcome—below-consensus result this week. With many braced for an ugly high-side reading of potentially well above 3%, headline inflation instead only nudged up to 2.8% y/y. (Curiously, the U.K. echoed the next day with an identical 2.8% read in April, also much lower than expected, and both a full point below U.S. inflation trends.)

The 0.3% m/m rise in seasonally adjusted prices was completely unremarkable, especially given that gasoline prices sprinted almost 9%. Quite simply, everything outside of gasoline was surprisingly well-behaved, highlighted by the trimmed mean core measure hitting 2.0% y/y on the button, its lowest reading in just over five years.

Let’s just say that this result is exactly what the doves ordered and somewhat dimmed the market’s heated expectations of rate hikes. As we detailed in last week’s Focus, and borrowing Waller’s technical language, it would be “crazy” for the Bank of Canada to embark on consecutive rate hikes with core inflation in full retreat and USMCA uncertainty heavily clouding the outlook.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.