Weekly Update 5/22/2026: Interest Rates Climb on War and Inflation Concerns
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- RTX wins two major contracts this week
- IBM is awarded a $1 billion government contract to build a foundry for producing quantum computing chips
- Walmart releases earnings reporting strong quarter but issues cautious guidance
- Deere releases earnings beating revenue and profit expectations
- Boeing China confirms 200 Boeing plane purchase
- NextEra announces acquisition of Dominion Power
- Stryker announces acquisition of Amplitude Vascular Systems, Inc.
Domestic Economic News
US homebuilder sentiment rebounded in May but remained low overall as affordability concerns continued to weigh on the outlook during the spring selling season. An index of market conditions from the National Association of Home Builders and Wells Fargo increased 3 points to 37, according to data published Monday. A value below 50 means more builders see conditions as poor than good. “Recent increases for long-term interest rates will continue to hold back home buyer demand,” NAHB Chief Economist Robert Dietz said in a statement. “Although some regional markets, including parts of the Midwest, are showing relative strength, the housing market continues to face significant affordability challenges.” Despite increased optimism, borrowing costs have climbed substantially since the beginning of the Iran war and persistent affordability constraints continue to sideline would-be homebuyers. Builders have had to respond by cutting prices and offering incentives, such as making upfront payments to lower customers’ mortgage rates. In May, 32% of builders reported cutting prices, down from 36% in April. Some 61% of builders reported using sales incentives, marking the 14th consecutive month at least 60% have done so. An index of sales expectations in the next six months increased three points to 45, remaining below the breakeven level of 50 for a fifth month. Its gauge of present sales increased 3 points to 40, and an index of prospective buyer traffic also rose. In March, the Senate passed a housing package that includes restrictions on institutional investors buying single-family homes, though the bill has run into resistance in the House. President Donald Trump also signed two executive orders aimed at boosting housing affordability, including steps to ease mortgage regulations and roll back some environmental requirements tied to housing development.
Pending sales of previously owned US homes rose for a third straight month in April, indicating firmer underlying demand at the start of the spring selling season. An index of contract signings increased 1.4% to a five-month high of 74.8, according to National Association of Realtors data released Tuesday. The median forecast of economists surveyed by Bloomberg was for a 1% advance. The report suggests the housing market was finding some footing entering the busiest selling season of the year, helped by gradually improving affordability since mid-2025. That said, lower-income prospective buyers remain challenged by high mortgage rates and elevated asking prices. “Buyers are coming out with cautious optimism despite increasing economic uncertainty and a slight rise in mortgage rates,” NAR Chief Economist Lawrence Yun said in a statement. At the end of March, the contract rate on a 30-year fixed mortgage rose to 6.57% which is the highest level since August. Home financing costs eased slightly in April but were higher than before the start of the Iran war in late February. Contract signings increased last month in three of four US regions. Pending sales declined in the South, the biggest housing market in the country, after solid increases in the prior two months. Because houses typically go under contract a month or two before they’re sold, the pending home sales data tend to be a leading indicator of closings that are captured in the monthly previously owned home sales reports. Separate NAR data on existing homes showed sales barely rose in April from a nine-month low.
US housing starts declined in April as construction of single-family homes dropped by the most in nearly a year, suggesting builders are growing cautious amid higher mortgage rates. New residential construction decreased 2.8% last month to an annualized rate of 1.47 million homes, according to government figures released Thursday. Starts of single-family homes declined 9%, the most since August, to an annualized 930,000 pace. Multifamily housing starts, however, rose more than 10% to the highest level since May 2023. The report also showed single-family permits, a leading indicator of future construction, fell 2.6% to the lowest level since August. The figures suggest homebuilders remain focused on working off a still-elevated inventory of new properties. While sales have increased in recent months, most were homes that were already under construction or finished. Numerous challenges remain for a sustained pickup in homebuilding, including rising mortgage rates, flagging consumer confidence and stretched household budgets.
US manufacturing activity expanded in May by the most in four years as customers strived to get ahead of mounting price pressures tied to the Iran war. The S&P Global flash May factory purchasing managers index rose 0.8 point to 55.3, data released Thursday showed. Figures above 50 indicate expansion. A gauge of prices paid for inputs jumped more than 11 points to the highest level since June 2022. The figures show how manufacturing is getting a temporary boost from the conflict, which has upended supply chains and driven energy and other costs sharply higher. A composite measure of business activity that includes services, meanwhile, was unchanged in May. The data show “only modest growth of business activity as demand was again squeezed by a further spike in prices and jobs were cut as firms worried over rising costs and the economic outlook,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement. “On average, over the past three months order book growth has slowed to its weakest for two years, and a boost from precautionary stock building due to concerns over further price hikes and supply delays will not last forever,” Williamson said. The group's composite measure of employment contracted at the fastest pace in nearly two years. Service providers reduced headcount at the second-fastest rate since the early months of the pandemic. Composite gauges of input and output prices advanced to the highest levels since 2022. While the cost of goods showed a notable increase, prices of services also recorded one of the largest advances in the last four years, the report showed. Supplier delivery times for manufacturers lengthened by the most since mid-2022. With the Strait of Hormuz effectively closed to shipping of energy and other key manufacturing inputs, inflationary pressures are becoming more pervasive. That's weighing on prospects for the economy, with the report showing the weakest expectations within the service sector since April of last year.
Applications for US unemployment benefits were little changed last week, signaling layoffs remain muted despite recent job-cut announcements. Initial claims fell by 3,000 to 209,000 in the week ended May 16, according to Labor Department data released Thursday. The median forecast in a Bloomberg survey of economists called for 210,000 applications. Continuing claims, a proxy for the number of people receiving benefits, edged up to 1.78 million in the previous week. Filings have remained subdued despite high-profile companies such as Meta Platforms Inc., Starbucks Corp., LinkedIn Inc., and Walmart Inc. announcing job cuts, indicating the labor market remains in the “low-hire, low-fire” state that has prevailed in recent years.
Interest Rate Insight and the Fed
Yields on the longest-dated US Treasuries rose to the highest level in almost two decades in early trading on Tuesday as investor concern over accelerating inflation fueled a selloff in global debt markets. The 30-year rate increased five basis points to 5.18% on Tuesday. The move pushed those yields to levels last seen on the brink of the global financial crisis in 2007. The move represents a new high-water mark after a weekslong rout pushed government bond yields across the globe to multiyear highs. Investors are seeking greater compensation to own longer-dated debt due to concerns over the war-driven surge in energy prices and worries over budget deficits. “With debt rising faster than growth, worsening inflation profiles, and no political will for fiscal reform, there is little reason to reach for the long end,” Ajay Rajadhyaksha, Barclays Plc.’s global chairman of research, wrote in a note Monday. The 5% level for 30-year US yields had been a considered a “line in the sand” by some investors that would spark dip buying. But the recent jump in long-term borrowing costs is challenging that assumption, potentially signaling a new era for the $31 trillion Treasury market, which heavily influences borrowing costs around the world. The higher-for-longer narrative has forced investors to reprice their outlook for monetary policy. Whereas before the war traders anticipated as many as three Federal Reserve interest-rate cuts this year, interest-rate swaps now imply growing odds that the Fed’s next move will be a rate increase.
Impactful International News
Andy Burnham, the current favorite to replace Keir Starmer as UK prime minister, has ruled out changing the government’s self-imposed limits on borrowing if he were to gain power. A spokesperson for the Greater Manchester mayor told Bloomberg on Monday that he wouldn’t make any changes to current Chancellor of the Exchequer Rachel Reeves’ fiscal rules if he were to enter 10 Downing St. after any leadership election later this year. Crucially, the spokesperson also ruled out exempting defense spending from the constraints. The pound climbed 0.7% against the dollar to $1.3415 after the statement, reversing some of last week’s losses which were the biggest since 2024. Gilts also rallied, lowering the UK 30-year yield — among the most sensitive to changes in fiscal policy — seven basis points to 5.78%. The statement followed days of questions about what sort of fiscal policy Burnham would adopt if he were to succeed the embattled Starmer. More than one-fifth of the governing Labour Party’s members of Parliament have urged the prime minister to step aside in the wake of disastrous local election results earlier this month, with many favoring Burnham or another replacement from the party’s left. Burnham had floated the idea of exempting defense spending from the fiscal rules in an interview with Bloomberg last month amid calls for Europe to a build a more credible sovereign military deterrent. While Burnham told broadcaster ITV over the weekend that he “supports” the current fiscal rules, his representatives had repeatedly declined until late Monday to rule out making any changes in future. While there are plenty of hurdles on Burnham’s path to 10 Downing St., the prospect of him becoming prime minister has been seen as a risk by traders, who fear he might increase public spending and gilt issuance. Although he has said that his remarks last year about the country being “in hock” to bond markets were taken out of context, they continue to resonate with investors. Gilts posted a sharp selloff on Friday on higher oil prices and the news that Burnham had a potential route to Westminster, as markets once again reflected concerns about instability in British politics and the possibility that a new premier could borrow more. UK notes edged up on Monday though yields remain near multi-year highs.
UK employers slashed jobs by the most since the start of the pandemic in April, suggesting demand for workers is weakening as the Iran war pushes up energy costs and saps business confidence. Tax data showed the number of payrolled employees dropped by 100,000 following a 28,000 decline in March, the Office for National Statistics said on Tuesday. It was far worse than the 10,000 fall expected by economists, with retail accounting for much of the decline. However, the ONS said the data is likely to be subject to bigger-than-normal revisions due to it relating to the start of the tax year when some returns from employers may be incomplete. Unemployment for the three months through March rose to 5% from 4.9% in the period through February, with the figure for March alone surging to 5.5% — the highest since 2015. Vacancies were the lowest since 2021. The data pointed to a sharp deterioration in the labor market in recent months as the energy shock caused by the war hits UK businesses. There have been over 140,000 job cuts in the past three months. Traders reacted to the figures by trimming bets on interest-rate hikes by the Bank of England to contain the inflation threat from the Iran war, pricing in 57 basis points of tightening by year-end. The pound was little-changed, trading around 0.8683 per euro.
UK inflation fell to its lowest rate in more than a year, prompting traders to bet on fewer Bank of England interest-rate hikes even though economists expect price pressures to return. The Office for National Statistics said its consumer prices index rose 2.8% in the year to April, down from 3.3% the previous month, reflecting more favorable annual comparisons and government support with bills. The figure was lower than forecasts of 3% by private sector economists and the Bank of England. Services inflation, a key sign of underlying price pressures, was 3.2%, the lowest since January 2022. Markets now see the chance of a rate hike in June at less than 20%, compared with about 50% at one point last week, based on swaps pricing. Wagers on the extent of rate rises throughout this year were also cut, with pricing of 55 basis points — equivalent to at least two quarter point moves — but seven basis points less than at Tuesday’s close. Gilts jumped at the open Wednesday after the release, sending the 10-year yield six basis points lower to 5.07%, while the pound hit a fresh low for the day versus the dollar after the data was released. Sterling dropped as much as 0.1% to $1.3376. Fuel costs surged 23% as the US-Israeli war on Iran continued to push up prices for British drivers. However, that increase was offset by lower household bills as a policy came into effect that switches much of the cost of green energy sources onto general taxation. It was part of Chancellor of the Exchequer Rachel Reeves’ budget last autumn that sought to tackle the cost of living. A year earlier, Reeves’ tax hikes and steeper utility bills pushed up inflation — producing a kind comparison in April 2026. Still, this decline in CPI is set to be short-lived, with the BOE expecting inflation to accelerate for the remainder of the year as the impact of global energy disruption intensifies. Capital Economics said the decline “feels like the lull before the storm and tells us very little about the persistence of the surge in inflation to come.”
Germany’s business outlook improved for the first time since fighting broke out in the Middle East, demonstrating some resilience to the war for Europe’s biggest economy. An expectations index by the Ifo institute rose to 83.8 in May from a revised 83.5 in the previous month. That’s a little higher than the median estimate in a Bloomberg survey of economists and the first positive turn in three months. A gauge measuring current conditions unexpectedly increased. “After the shock of the war, which could be seen in March and April, we now have a slight stabilization,” Ifo President Clemens Fuest told Bloomberg Television on Friday. “Businesses are trying to adapt to this new situation. Nevertheless they’re facing challenges.” Germany, like the rest of Europe, is starting to experience a drag on its economy as the Iran war feeds inflation and saps confidence among households and firms. The government has already halved this year’s growth forecast, and business surveys this week showed private-sector activity shrinking for a second straight month in May. Separate data Friday showed a surge in exports and higher government spending offset flat consumer demand and a drop in investment to ensure first-quarter expansion of 0.3%, matching an earlier estimate. The numbers offer a small reprieve for German Chancellor Friedrich Merz, who’s faced pressure to rekindle growth through comprehensive reforms. The economy, Europe’s largest, hasn’t seen meaningful expansion in three years, with government infighting not helping its chances of improving. Carsten Brzeski, global head of macro at ING, warned that trade won’t be able to repeat the strong performance, companies will probably hold on to higher inventory levels, private consumption is unlikely to recover, and higher interest rates will hamper activity in the construction sector. “This leaves the public sector as the only possible source of growth in the second quarter,” he said. That’s “not a very promising outlook.”
Company Events
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