2026 mid-year outlook: Resilient growth, sticky inflation, shifting policy

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Fabio Bassi: Well, we believe that the macro outlook of resilient growth and sticky inflation is going to reinforce the broad risk on narrative that we have witnessed in the second quarter of this year.

Jay Barry: There's been the ongoing resilience of the U.S. economy. And alongside that, we have actually seen a pickup in labor demand.

Mislav Matejka: The broader market did fend off the stagflation fear as well and rising bond yields and the repricing of the central banks to become more hawkish and also the elevated oil price, but it was really the AI trade that was the key driver of resiliency.

Fabio Bassi: Credit as an asset class deliver positive return from broadly stable spread and decent coupon income, making the asset class very resilient.

Stephen Dulake: I think as we move into the second half of the year, we seem to be at the beginning of some off-ramp hopefully from the conflict in the Middle East, while lower oil prices have a positive impact on the rate of inflation, some of the economic resilience that we've seen is likely to be reinforced, not least here in the U.S.

Sam Azzarello: Welcome to JP Morgan's Making Sense. I'm Sam Azzarello and I lead content strategy for global research here at J.P. Morgan. We're at the midpoint of 2026 and it's been a year defined by big moves across markets, shifting expectations for inflation and policy, and persistent geopolitical headwinds. So today we're doing a global check-in. What's held up so far, what have been the biggest surprises, and what matters most for the second half. We'll start by hearing from Bruce Kasman on how the global economy has navigated the first half, and what macro signals he's watching. Then we'll be joined by various members from JP Morgan Global Research to unpack the themes driving markets, from equities and rates to FX and commodities. So with that, let's get started. Bruce, thanks so much for being here today.

Bruce Kasman: Hi, Sam. Thanks for having me.

Sam Azzarello: So Bruce, on the whole, how has the global economy held up in the first half of 2026?

Bruce Kasman: I would say that the first half of 2026 has reaffirmed our core macro views against the backdrop of a very significant geopolitical shock with the Middle East conflict. We came into the year anticipating business sector lift, as we began to move through the trade war fears, as we began to see, I think, the dynamics of what had been a very positive environment in 2025 for business behavior in terms of profitability, inventories moving lower. And we were starting to see the lifting in the business sector, both in terms of spending on tech, spending on non-tech activity beginning to recover. And key to our forecast was a recoupling of the labor markets. What's I think important about the first half of the year is that the Middle East conflict pushing energy prices up has taken some steam out of that and we do think we're seeing a slowing in consumer spending now, but it hasn't changed the contours of the global outlook as we had been forecasting it.

Sam Azzarello: And do you foresee inflation surprises or any signs of weakness emerging in the second half of the year?

Bruce Kasman: I think the inflation outlook is somewhat mixed here. Inflation has moved up sharply, both in terms of headline inflation and core. Some of that is the energy price increases. Some of it we think is some pressures that are associated with the strength of tech and the strength of global industry as well as bunching of price increases, which is common at the beginning of the year. If we're right, what happens next is that the run rates on inflation start to move lower, both in terms of headline and core. But I think importantly, what we're expecting is to see a year in which when we go through these ups and downs, core inflation is still running 3% or higher in the U.S., running 3% or higher globally. Sticky, persistent inflation will continue to be a theme even as we see some unwind of the early year increases.

Sam Azzarello: All right. And last question for you. What are the key macroeconomic themes you'll be keeping a close eye on going forward?

Bruce Kasman: Well, the key themes for us are sticky inflation, a recoupling of the labor market, which generates job growth of over 100,000 a month for the U.S. and consistent on a percentage change basis globally, a global business sector which is responding to the positive influences that came last year and is in solid expansion mode helped by tech. And the dynamics of this gives you broad-based growth in the global economy, but importantly, against the backdrop of relatively, uh, low growth and labor force in the face of what we think is elevated inflation that is likely to be persistent is gonna require central banks to lean against this with what we think will be a shallow but broad-based tightening in monetary policy that has already included the ECB, and we do expect to include the Fed as we turn into 2027.

Sam Azzarello: Fantastic, Bruce. Thank you so much for joining us today.

Bruce Kasman: Thank you.

Sam Azzarello: Next, we'll look at rates with Jay Barry, head of global rate strategy. Jay, thanks for joining us.

Jay Barry: Thanks so much for having me, Sam.

Sam Azzarello: First question for you. How have global rates markets evolved in the first half of 2026, and what were the key macro and policy drivers behind those moves?

Jay Barry: You know, Sam, we've actually had a major set of moves across developed market, government bond markets this year. And I think heading into 2026, most market participants had envisioned central banks to be on hold, like the European Central Bank or the Reserve Bank of Australia, or potentially easing further like the Fed and the Bank of England who were both expected to ease in the first half of 2026. But the conflict in the Middle East has turned the economic and policy outlook completely on its head, and that was sort of the predominant driver about repricing central bank expectations and alongside with it broader developed market rates markets over the first half of this year. So as the war broke out, expectations of particularly inflation fighting central banks that they could remain on hold was put on its head. And that trade unfolded most aggressively in both the Eurozone and the UK, where those were both areas which were much more impacted by the energy shock than has been the case in the U.S., but also have central banks who were solely focused on fighting inflation. So, markets began to price in a more aggressive set of hikes for both the ECB and the Bank of England as the war unfolded and energy prices increased. But that has been picked up in the U.S. in recent months as well and has not necessarily been because of the energy price story because the U.S. of course is a net energy exporter, and the Fed has a dual mandate focused both on labor markets and on inflation. However, as the conflict has unfolded, even though the shock has been aggressive, there's been the ongoing resilience of the U.S. economy. And alongside that, we have actually seen a pickup in labor demand. So what our economics team has been forecasting for some time, which is this broad recoupling of labor markets with growth, has happened. And as that's happened, it's allowed markets to price in a more hawkish scenario for the Fed as well. The resting position for the U.S. markets to start the year were the risks of further Fed easing, because there was a bigger risk that the labor market would weaken further necessitating lower policy rates than of inflation rising further. But as the labor market has firmed up, it's led markets to price in and expect a Fed that's on hold, if not actually price hikes over the balance of this year. So in aggregate, it's been this hawkish repricing of central bank policy expectations globally that has repriced rates markets and those moves have occurred anywhere between 30 and 90 basis points at the front end of the yield curve. That's translated into bond yield moves, which have been something like 20 to 50 basis points higher across the curve. And those moves to higher yields at the long end, we think have been exclusively about the shifts in monetary policy and not really about fiscal or about term premium as well. So, it's been a major repricing here and it's led markets to price in central banks will continue to raise policy rates over the balance of this year.

Sam Azzarello: And as for rates, our view has been for the Fed to remain on hold until 2027. Though market expectations are changing. Do you now foresee a rate hike taking place in the coming months? And if so, under what conditions?

Jay Barry: So as you mentioned, we've forecast the Fed on hold throughout 2026 for quite some time now, but our forecast actually has a hike penciled in for the second half of 2027. Markets are currently pricing in about 30 basis points of hikes over the next year or so. So it's not terribly out of line with our own forecast, but we think that the conditions around the central bank's reaction function are changing. As I mentioned before, for the first few months of the year, policymakers were exclusively focused on weakness in the labor markets. And though the Fed's dual mandate was intention, with labor markets far from full employment and inflation far from its 2% core PCE target, now the tension has closed, at least on the labor market side and the Fed seems to be ready to adopt a neutral bias. And while that seems against the backdrop of a neutral bias at odds with market pricing and hikes over the next year, we think that makes sense because we're in a world in which term premiums have normalized in the U.S. and globally. So that merits an upward slope to the term structure, which we're seeing right now. And we really think in order to justify hikes being priced, what we're going to need to see here is a continued development in the labor markets in which we see the unemployment rate come down, because to date, the pickup employment growth has not been met with the decline in the unemployment rate. If the unemployment rate begins to decline towards 4% on a sustainable basis, then this will likely justify markets pricing in an earlier and more aggressive set of Fed hikes. But for the time being, we think this merits the Fed actually staying on hold, and at the same time against the backdrop of market structure, which has changed aggressively over the course of the last few years, and demand for government bonds, which has rebalanced away from central banks and foreign official institutions and banks towards more price sensitive investors, this justifies an upward slope in the markets. But, we just don't see the Fed actually hiking until next year.

Sam Azzarello: Great. And final question for you, Jay. Looking ahead, what are the key market risks you'll be looking out for in the coming months?

Jay Barry: So I think there are three or four that we'd identify on the risk side. The first is what we just spoke about, which is the labor market. And so far in the year to date, employment growth has picked up, but the unemployment rate hasn't fallen. If the unemployment rate begins to fall against the backdrop of inflation, which is now running above the Fed's target for the sixth consecutive year, this could be something which has markets price in a more aggressive set of hikes than are currently being priced into the U.S. money market curve. The second, importantly, is turnover in Fed leadership. We've been sitting here waiting for newly minted Chair Warsh to reveal his policy leanings since he was nominated back in early February. But now that he's sitting in the seat, will he truly be dovish, as was sort of in his conversation as he was nominated and confirmed for this role, or will he pivot back to a more hawkish outlook, which is what he really had as a Fed governor back 15 to 20 years ago. So how Chair Wash reveals his preferences for monetary policy will be a key risk for markets. The third is the midterm elections and right now markets are pricing in the likelihood that the GOP will lose control of the House but maintain control of the Senate. And traditionally, a split government has meant gridlock and meant little for fiscal policy. However, if the Republicans managed to remain in control of the House, then markets could continue or begin to consider the fact about fiscal policy once again, because both the Pentagon and the White House have been talking about a significant increase in defense spending. And if that were to occur, that would bring term premium back into the conversation and could result in higher yields in the U.S.. In large part because we're not now in a point in which we're running a 6% budget deficit as a share of GDP with the labor markets at full employment. If we consider more spending against the backdrop of the economy where we are right now, this could justify markets pricing in higher interest rates in the future on anticipation of more government bond supply. And then fourth and finally, I think it's the obvious one, while we think there is some resolution to the conflict in the Middle East, if there is no resolution and energy prices begin to rise once again, we'll have to consider what that means for the balance of risks for the U.S. and for rates globally as well.

Sam Azzarello: Jay, thank you so much for sharing your views.

Jay Barry: Thanks so much.

Sam Azzarello: Next, we'll take a look at emerging markets with Ben Ramsey, head of emerging markets sovereign credit strategy. Ben, great to have you on the podcast.

Ben Ramsey: Hi Sam, thanks for having me.

Sam Azzarello: So, Ben, from political change to fiscal consolidation, what were the major themes that shaped emerging markets in the first half of 2026?

Ben Ramsey: The bottom up themes are always important, but I think that we've really been dealing with since Liberation Day a very interesting diversification theme, which has been benefiting emerging markets largely. Emerging markets tends to benefit from dollar weakness, certainly from a fundamental point of view, weaker dollar meaning a stronger currency for emerging markets. It's something which helps balance of payments, something that attracts inflows. EM has really been an asset class which has been underallocated to really over the last decade. When we see this turn for dollar weakness, local currency strength, that's clearly a benefit for EM local fixed income markets. As we came into the first part of 2026 was questionable whether or not that had run its course. The theme around whether the dollar was going to continue on a weak path or get stronger was really important for emerging markets. We saw emerging markets, local currency returns, local markets returns bounce around a little bit on the back of that theme. I think for hard currency, meaning sovereign debt and EM corporate credit, that theme of weak dollar versus strong dollar was still kind of catching a tailwind from an overall diversification away from the U.S. theme. So certainly a return to U.S. exceptionalism was part of the narrative, but I think moving into EM sovereigns, which have really shown to be resilient from a fundamental point of view, started to catch a good backdrop and the backdrop was also reinforced by what was really underpinning a return to some strong dollar, which was strong U.S. growth, strong global growth. Strong growth has really been, in our view, what's underpinned tight spreads and that's kept a tailwind behind emerging market sovereigns. And we see spreads are back to the tights of the year really through the tights of the year despite this around conflict. Some of that also another theme is technicals. And as I mentioned, EM has been under allocated for really the last decade. Certainly we've seen outflows in recent years. It seems like since Liberation Day, we've seen an inflection point and we've seen consistent return of inflows into emerging markets. I think benefiting again from that diversification angle, we saw just really a blip of outflows in March when we had the Iran attention and we're back to inflows again. And then finally, elections are always important. So yes, getting back to the bottoms up. We've had important elections this year in Hungary, Columbia, we're looking forward to Brazil. Markets have moved dramatically on the outlook for all of those elections. I think basically as we have political risk everywhere, emerging markets knows political risk very well in terms of always being a core part of investing in this asset class.

Sam Azzarello: Fantastic. Thank you. And how has EM sovereign credit performed, and what do you expect to see in the second half of the year?

Ben Ramsay: Yeah, EM sovereign credit really held up well in the first half of 2026. I wouldn't say we had amazing returns, but despite all this volatility and despite very tight, historically tight spreads, we've seen positive returns about 2.5% and we've seen spreads almost 30 basis points tighter. Looking into the second half of the year, our base case for now is we're going to keep on grinding, but we do need to be discerning given how tight spreads are. We're at 20 year tight for spreads. The risk-reward ahead looks pretty asymmetric. We do see limited room to tighten, but we don't see what's going to catalyze us towards significant spread widening absent some return to the narrative of recession risks. That said, we have a market way call. We do think that spreads are likely to finish the year modestly wider as the Fed is likely to tighten or at least point towards some concern on the inflationary stance. But we do tend to see some volatility in spreads when the Fed is moving higher. If the Fed is moving higher because growth is good, we think that's going to ultimately keep us from repricing significantly in terms of EM sovereign spreads. We can grind tighter for now. Don't really see that catalyst for a major spread widening even if we think spreads can be modestly wider by the end of the year.

Sam Azzarello: And last question for you, Ben, overall, are there any key risks for emerging markets that you'll be keeping a close eye on in the coming months?

Ben Ramsay: Yeah, I mean, I think it's kind of what we've mentioned. It's always oil and geopolitics. We've been whipsawed around a little bit in terms of where the oil price has been through the course of the year and now where we're starting the second half. The Fed as mentioned, and then of course there's always policy uncertainty, including trade policy uncertainty. I think all of these matters because valuations are all pretty tight and on the local market side, because we have had the rates backdrop, certainly put some pressure on EM rates and put some volatility into EMFX. So Middle East conflict, the base case here is that we were going to have oil stabilizing in a higher range. I think we'll have to reassess where we're looking in terms of certain recommendations. Next, there's the Fed. Central expectation is on hold this year. We've highlighted in our mid-year that again, sticky inflation, better labor market does increase the probability of some type of hawkish shift. And as I mentioned, EM tends to struggle when the Fed is repricing fast, especially if it's driven by real yields. So I think just the nature in which the market internalizes what the Fed is going to do obviously matters a lot for us as well. And then in terms of trade policy, it's sort of faded in terms of the immediacy of how we're seeing it from EM, but there is still broader tariff uncertainty. There is uncertainty when it comes to the U.S.-Mexico trade relationship and that's a key emerging market country. And then as we go into the second half, of course, midterms in the U.S. will start to dominate the narrative. I think on the EM side, probably not a game changer, although there have been some geopolitical alliances that the Trump administration has taken, particularly in South America. We can look at Venezuela, we can look at the support for Argentina, and I think not just the midterms, but probably looking ahead to 2028 and markets will start to assess how durable those relationships may be.

Sam Azzarello: Great. Thank you so much for sharing your insights.

Sam Azzarello: So to briefly recap some of what we've heard so far, across the macro backdrop, the first half of the year largely reaffirmed the core view. Global growth has held up, despite the Middle East shock, helped by a recovering business sector, especially tech and recoupling in labor markets. But higher energy prices have started to weigh on consumers, fueling inflation, which may then lead to central banks going hawkish in 2027. And that's exactly what showed up in rates. Markets repriced a more hawkish path driven by the energy shock and firming labor demand. And in emerging markets, dollar weakness was a key tailwind supporting local returns and flows. EM sovereign credit held up with modest positive returns despite historically tight spreads. The second half though may see a more selective risk-managed grind with oil, Fed repricing, and policy uncertainty as key watch points. So that's the macro foundation, growth resilient, inflation still sticky, and policy expectations shifting. And yet, despite the geopolitics, higher yields, and that hawkish repricing, equity markets have had a very strong first half. To walk us through what's really been driving the rally and what could matter most in the second half, I'm joined by Mislav Matejka, head of global equity strategy. Mislav, thanks for being with us.

Mislav Matejka: Hi, Sam. Thanks for having me.

Sam Azzarello: So Mislav, I just mentioned the rally we've seen in the equity markets this year. What were some of the key drivers of the global equity boom?

Mislav Matejka: So for the equity markets overall, they had a very strong first half of the year, and that's really in spite of all the geopolitical news flow. As of mid-June, MSCI World is up more than 12%, total return in dollars beating all other asset classes apart from commodities. We also called in March to enter Mag 7 as the group became the cheapest in 10 years. And Mag 7 really, that trade is nothing to do with geopolitics. It's really orthogonal to the war news. And this was really the key driver of resiliency. The AI, the broader market did fend off the stagflation fear as well and rising bond yields and the repricing of the central banks to become more hawkish and also the elevated oil price. But it was really the AI trade that produced the upside in the first half of the year. Our bullishness on EM was also rewarded through the overweights in the memory space, Korea, Taiwan, semiconductors more broadly. Now, if you put it all together, this move resulted in an extremely narrow market. If you look at the proportion of stocks that are beating global benchmarks on a three-months lookback period, that is a record ever low now. So there is really a potential for some more balanced leadership in the second half and really some broadening.

Sam Azzarello: Thank you for that. And next question for you. Do you see the S&P 500 hitting new highs in the second half of the year?

Mislav Matejka: So if our constructive macro backdrop plays out where at the start of the year we outlined the support for equities from strong earnings delivery, know the anchoring of inflation expectations, and at the same time, geopolitical risks to fade in second half, then equities in general and S&P 500 in particular should be really making fresh highs in second half. AI trade remains key for S&P 500 given almost half the weight.  Now, apart from the bullishness on the AI, which we still have, we think that certain cyclical sectors will be performing well in second half, such as financials, such as industrials. And therefore, yes, for S&P 500, that should mean further upside.

Sam Azzarello: Fantastic. And final question, what other markets or indices will you be watching closely in the coming months and why?

Mislav Matejka: So at regional level, we remain bullish on emerging market equities, which we have upgraded to overweight early last year. Japan still appears attractive as well. And even Europe could see a catch-up in second half. And sector-wise, the rotation into consumer space is showing signs of life. Uh, luxury sector has been off lows for some weeks now, as are airlines, hospitality sectors, retail as well. Don't get me wrong, consumer is in the eye of the storm with all the oil and interest rates impact, but we highlighted recently that this is the on cyclical subgroup which is yet to rally and that could be really on the cards in second half, and that is in particular the oil price and interest rates unwind some of the spikes seen in the past few months, which were a big problem for the consumer. So the rotation into consumer in second half would be a pain trade as most portfolios have been rightly up until now, but they have been and still are underinvested in the space.

Sam Azzarello: Thanks, Mislav, really appreciate you sharing your views.

Mislav Matejka: Thank you.

Sam Azzarello: And now for a look at credit markets. Stephen Dulake, our co-head of global fundamental research joins us. Steve, thanks for stopping by.

Stephen Dulake: Thank you for having me.

Sam Azzarello: To start us off, what were the key developments in credit markets in the first half of the year?

Stephen Dulake: The key development is maybe that there wasn't such a key development. I think the one thing which is very noteworthy about credit markets in the first half of the year, at least public credit markets, is just how robust they were. I think that reflects first and foremost the overpowering influence of all-in yields. So as much as we've seen some underlying volatility in government bond yields and we've seen slightly higher government bond yields, what that has meant is that all-in yields on the public-facing part of credit markets has remained in a pretty attractive zip code for institutional investors. So despite all of the challenges, whether it's being geopolitics, concerns around central bank tightening as a result of inflation, credit spreads broadly speaking, have been a lot less volatile than other asset classes. I think there is one other factor at play here. It's not just all-in yields being attractive, but maybe we need to think slightly differently about credit spreads in the sense that the credit spread is a difference between the yield on the risky asset versus the risk-free asset. And I would say, when you think about the underlying state of government balance sheets, one can credibly make a case that the risk-free asset is maybe slightly less risk-free than it has been in the past. So maybe we also need to think a little bit differently about credit spreads on the go-forward.

Sam Azzarello: And next question for you, do you see spread widening in the coming months? And if so, why?

Stephen Dulake: I think as we move into the second half of the year, given what we know today, which is that we seem to be at the beginning of some off-ramp hopefully from the conflict in the Middle East, while lower oil prices have a positive impact on the rate of inflation, some of the economic resilience that we've seen is likely to be reinforced, not least here in the U.S. So I think that the debate about the orientation of Fed policy as we move into 2027 will continue as we move into the second half of the year. Could it be that a recalibration in short-term interest rate expectations based on the idea that maybe policy rates rise more quickly than our own base case forecast, which is that the Fed raises rates for the first time in '27? Could that inject some vol and necessitate a risk premium in credit spreads? Absolutely. So yes, credit spreads could widen a little bit, although I'm not overly sold on the idea that they could widen a lot based on what we know today.

Sam Azzarello: Steve, final question for you. Let's take a closer look at the private credit market, which has been in the spotlight in recent months. What's your overall outlook from here?

Stephen Dulake: Our overall outlook for private credit markets from here is what we'd call a, a reversion to the core, both from a participating-capital perspective and from a manager-of-capital perspective. So the retail noise that we're currently seeing in and around the asset class as retail investors seek to withdraw money from funds to which they've contributed to, that isn't going to go away, as we've seen. What I expect to see going forward is a decline in retail relative to institutional participation. So that's reversion to the core in the sense of who's providing the capital and who's investing in the asset class. And at the same time, I do think we will see some manager attrition. As we've seen a retail infusion into the asset class, everyone has wanted to be part of that party. We've seen an expansion in the manager base. And I think that will decline going forward. And I think that the large funds that have been present in the asset class through the cycle for many, many years likely get bigger at the margin. So I think that where we end up is with an ecosystem that is arguably much more stable today than we've seen over the first half of the year as a result of less retail and a concentration in terms of who's managing the capital. The other big issue, of course, is software exposure. We think there's a meaningful ramp between here and '28 when software maturities pick up for buyers and lenders to get their heads together and find some kind of solution from a refinancing perspective. So that doesn't mean that there won't be software stress, it doesn't mean that there won't be software defaults, but I guess we're taking a little bit of a glass-is-half-full, uh, view, at least relative to what the consensus is we've been willing to take for some time. And we think that the issues are manageable, which is to say that we don't think the issues around the asset class are systemic. And what I would say is that I think all told, private credit is going through something of a stress test that we quite frankly didn't anticipate at the beginning of the year. I think most people's catalyst for a stress test was recession. We clearly haven't seen that, but we're seeing these challenges to the asset class come from other forms, namely retail and software. We think the asset class will survive those. We think it has a reason to exist, and we, we'll get to the other side.

Sam Azzarello: All right, Steve, thanks so much for joining us. Really appreciate the time.

Stephen Dulake: Thank you for having me.

Sam Azzarello: So on credit, the headline was resilience with spreads staying relatively stable, but the risk is a repricing of the path for policy rates, which could bring more volatility and some modest spread widening. And in private credit, the theme for the second half of 2026 is a reversion to the core, less retail participation, more concentration among established managers, that alongside a watch point on software exposures as maturities build towards 2028. Equities had a strong first half, and the big story was how much of that strength came from the AI complex, particularly the Magnificent 7. The flip side is that market breadth is extremely narrow. So the question for the second half is whether leadership can broaden if rates and oil cool. Now let's move on to currency markets where Meera Chandan, co-head of Global FX Strategy, will give us a rundown on what to expect in the coming months. Meera, great to have you with us.

Meera Chandan: Hi, Sam. Nice to be here.

Sam Azzarello: So Meera, how did major currencies such as the dollar and the euro perform in the first half of 2026?

Meera Chandan: Sure, Sam, if I look at the Broad Dollar Index, it's actually relatively unchanged relative to the start of the year levels, that's on a trade weighted index basis. But if I look at the returns broken out on a pairwise basis, by currency, actually you see quite a bit of divergence in there. So within the DM space, for example, most currencies are weaker versus the dollar. You look at some of these low yielding currencies that are commodity importers, energy importers, things like stokkie, for example, is almost 4% weaker versus the dollar on the year. Whereas you have the commodity exporters like the Australian dollar, or nokkie, which are also the highest yielders within the DM space, up 4 to 5% versus the dollar. So there's a lot of diversions going on in there. And on the EM side, you saw a very similar story where the most oil vulnerable, energy vulnerable currencies are the ones that weaken the most, a lot of that was in Asia. In contrast to the currencies that actually did well, were either the higher yielding oil exporters, energy exporters, or commodity currencies in general like Brazil, or cases where actually there were strong idiosyncratic developments like Hungary, for example, but also high yielding space. So the broad brush, I would say the big divergence was commodity importers, underperforming the exporters, and then the low yielders underperforming the high yielders within the currency space.

Sam Azzarello: So is the macro landscape becoming more dollar positive and how will this impact the wider FX market?

Meera Chandan: It certainly is getting more dollar positive. The big shift that we've seen really unfolded after the onset of the U.S. -Iran conflict when energy process started to head higher. Essentially, what that meant was the U.S., which is an oil exporter, actually benefited quite a bit through the terms of trade channel in contrast to the rest of the world. And what we've seen, even though oil prices have come off more recently, some of these U.S. exceptionalism channels start to become a little bit more entrenched. So it's not just about oil, it's about a broader spectrum of things. Things like growth is actually doing much better in the U.S.. From a bottom-up perspective, we'd actually seen growth upgrades in the U.S. and contrast to Europe and some parts of Asia. If I look at the equity market performance, obviously U.S. is, uh, pretty high up on that list year to date. If I look at the yields channel as well as working in favor of the U.S., actually the Fed has had to respond to the [inaudible 00:26:42] employment data that we're getting in the U.S. and the inflation data as well to become more hawkish. So U.S. exceptionalism is coming back, it's not as high intensity as it was in 2022. But certainly I think the tide has turned for the dollar and I think one key difference going into the second half of the year is that we're gonna be bullish on the dollar on that basis. The other more dominant theme, I think the fact that carry, the high yielding currencies outperform the low yielding currencies in the first half of the year, that's a theme actually that we think continues. So the dollar is a shift. The theme on carry continues because at the end of the day, if inflation is firm, central banks are keeping rates higher for longer, growth is decent, that basically means that investors in FX space are gonna be searching for carry.

Sam Azzarello: And finally, which currencies will you be keeping a close eye on in the coming months?

Meera Chandan: So the euro obviously is a big one. I think conditions are in place, uh, for a range break. There's a euro-dollar towards 110, I think, which is basically lowering our sites from the previous, uh, lows we had in euro-dollar. We were thinking it'd be range bound with a low of around 113, lowering that towards 110 on this U.S. exceptionalism story is one key theme for us. I think the Japanese yen is gonna be interesting because we are close to what would be considered as intervention levels, but obviously there's a push and pull here, if the Fed's more hawkish, the yen can weaken further. So we are looking for dollar-yen to start to get towards sort of the 164, the mid 160s area. So that's one thing to keep an eye on as well. And then I would say within the DM space more broadly, Australia is a high yielder. Can it continue to benefit even though the RBA's hikes are coming to an end, I think is gonna be a key question. It's been an out-performer year to date. We still like that from a carry perspective, but some of the domestic factors are fading. And then finally, I would say CNY, you know, dollar- CNY heading lower has been one major anchor for the dollar complex as a whole. If that continues to stay fairly range bound, then the dollar I can see consolidating or staying in a range. But if we do see China start to change its policy stance on CNY and perhaps if dollar-CNY starts heading higher, so i.e. the yuan weekens, I think that can actually have pretty large spill refresh to the broader FX complex globally. So that's one thing I'd be watching pretty closely as well.

Sam Azzarello: Great. Thank you so much, Meera.

Meera Chandan: Thanks, Sam, for having me today.

Sam Azzarello: And now we're going to turn to commodities. Joining us is Greg Shearer, head of Base and Precious Metals Research. Greg, thanks so much for joining.

Greg Shearer: Hi, Sam. Thanks for having me.

Sam Azzarello: So first question for you. All eyes have been on the Strait of Hormuz and whether oil can start flowing through the passage again. How do you think oil markets will react to a full reopening?

Greg Shearer: Yeah, we think a reopening is in the cards. So our current supply estimates are assuming something where there is a gradual resumption of oil flows through Hormuz. What that really looks like is something where by July, we're getting back to around 68% of pre-conflict levels and then the rest of the year through 2026, creeping up towards about 100%. So it does jump quite a lot over the summer and then it's a long tail of supply resumptions. What that really means though, or what the market needs to contend after the recent selloff is where are we going to be on balances and what really drives our price forecast is OECD commercial inventories. The most recent publicly reported data from the likes of IEA are actually showing that the overall market rebalancing that we thought, essentially the close to 1.6 billion barrels of cumulative shortfall between late February and August is still tracking. The interesting dynamic is that the releases from strategic players, governments, have been tracking what we expected, but the OECD commercial inventory decline has been materially less than we expected. And that indicates that there's likely a larger degree of demand destruction that has come into this market. Long story short, what this really means is that over the balance of the year, this lower than expected draw on OECD commercial inventories implies materially less upward pressure than what we were thinking maybe a, a month or two ago. And now what we see for Brent prices themselves is something averaging around $86 per barrel in the third quarter of '26 and $80 per barrel in the fourth quarter of '26. So ultimately exiting this year at a level around $78 per barrel. This over the second half of '26 is still higher than where we see the current forward curve trading, even though we think that this downward pressure carries on into '27 where our price forecast average is something around $64 per barrel, which is below the curve for next year. So long story short, what we're seeing from a balance and recovery perspective actually still does imply that prices over the second half of the year are going to trade well above what is currently embedded into the oil forward curve.

Sam Azzarello: Great. And final question for you. Which other commodities will you be watching closely in the second half of the year and why?

Greg Shearer: Yeah, definitely on metals, I think the first thing is gold. What we've seen here is that the hawkish Fed from Kevin Warsh and the communications at the last FOMC has really turned this pause in the structural bullish gold story into a bit of a deeper freeze. And within that, what we're really seeing is there's a very large lack of engagement as long as the specter of rate hikes are hanging over this market. Our focus has shifted here into copper. What we see in copper is actually quite a structurally supported fundamental backdrop, seeing essentially a global industrial upturn. We're expecting stronger momentum in China in the second half of '26, which is a key market. All of that coming where mine supply in this copper market still remains very anemic. But the biggest single factor that we're expecting over the second half of this year is essentially a tariff review for refined copper in the U.S. What's happening in the copper market right now is that the U.S and China are in an essential tug of war for copper and what that's really leaving is ex-US market balances exceptionally tight. Our ultimate view here is that the U.S. will structure refined copper tariffs in a way that keeps imports attractive to the United States, keeping this sort of tug of war and struggle for copper ongoing and ultimately opening the door here for copper prices to push up towards around $15,000 per metric ton.

Sam Azzarello: Fantastic, Greg. Thank you so much for joining us today.

Greg Shearer: Thank you, Sam.

Sam Azzarello: To round out today's episode, we'll hear from Fabio Bassi, head of Cross-Asset Research. Fabio, thanks so much for taking the time.

Fabio Bassi: Hi, Sam. Thanks for having me.

Sam Azzarello: Taking a cross-asset view, which asset classes have performed well in the first half of the year, and which have struggled?

Fabio Bassi: The first half of the year has been characterized by the supply shock, uh, arising from the conflict in Middle East and the subsequent spike in oil price. The energy complex of the commodity spectrum perform, uh, strongly year-to-date. Brent oil price jump initially from $60 to almost 120, before retracing back to current level, just below 80, following the dedication of a signing of the memorandum of understanding between U.S. and Iran. The shock of oil inflation led also to a repricing of monetary policy expectation with a large bear flattening of the developed market year curve impacting the performance of bond across markets. The capital losses almost fully compensated the coupon income, triggering less than 1% return for U.S. treasury and Euro area bond with modest negative return in yields, and especially JGB. Credit as an asset class deliver positive return from broadly stable spread and decent coupon income, making the asset class very resilient. Equity markets started the year well, corrected in the first month of the war, but rebounded sharply since late March. Drivers have been a combination of strong earnings, and the widening of the AI upstream theme on strong computational demand following the release of Anthropic's Mythos model. U.S. equities and tech have been the clear winner of the post-war lows, with the AI theme becoming the dominant driver of the equity narrative. Country-wise, the AI and tech narrative also helped the EM equity, and especially Korea and Taiwan as the beneficiary of the AI bottleneck theme in semiconductor. Interesting, the war was also positive for the dollar, which benefit from repricing of monetary policy expectation on improvement of the labor market, from shades of U.S. equity exceptionalists coming back, and clearly less concern about Fed independence. While the rest of the world, like Asia and Europe, were seen as the relative loser of the oil shock as large energy important regions. In a nutshell, in a world where oil shock repriced rates resulted equity leadership into AI winner and pulled the dollar higher, the real trade was managing the new cross-asset correlation.

Sam Azzarello: Great. And looking ahead, which asset classes will you be taking an especially keen interest in for the second half of 2026, and why?

Fabio Bassi: Well, we believe that the macro outlook of resilient growth and sticky inflation is going to reinforce the broad risk on narrative that we have witnessed in the second quarter of this year. So, we continue to see a favorable fundamental macro backdrop and remain positive on risk asset into the second half of the year. We believe that the support from central banks would be more limited than price at the beginning of the year. And in line with our non-consensus view, we don't see the Fed cutting this year. This means that the equity leadership will be more driven by quality growth, large cap, and the tech sector with broadening of the AI theme beyond mach 7. AI continue to remain the dominant growth impulse. We still see the upstream AI complex and capex broadening as the key driver with U.S. at the epicenter by private capital investment, with selective emerging market offering a broad EBITDA to the same theme. In rates, the EM bonds will continue to adjust to the new stance of monetary policy after the hike of the ECB and the BOJ in June. We expect further rights for them in September and October respectively. And with the BOE, we expect them to deliver the first hike in July, although the risk are for a later hike. Our call is for the Fed to stay on hold until the end of the year, with the first hike in September next year, but a decline in the unemployment rate with core PC above 3% could trigger a hike in the spring of next year, or even in December. What does it mean for bonds? It means that there is a risk of a bear flattening of the dollar treasury curve. In terms of other asset classes for the rest of the year, the outlook continue to remain constructive on credit, given the all-in yield remains attractive in a macro dynamic with limited recession risk. Even if we believe that the level of the spreads are unlikely to tighten further from here. Gold lost the appeal of last year, but in our view, still remain a low intensity bullish story on diversification from Central Bank, although higher for longer rates from the Fed could act as a drug, especially in terms of demand for ETF flows. So, bottom line, with growth resilient and inflation sticky, we stay pro risk into the second half of the year, leaning into AI-driven quality growth and credit carry, while respecting the higher for longer rates and a renewed risk of a bear flattening of the U.S. treasury curve.

Sam Azzarello: And last question for you. From geopolitics to inflation dynamics, what are the macro and market themes that will likely shape the markets in the upcoming months?

Fabio Bassi: Well, the tension between, uh, resilient growth and sticking inflation, in our view will drive the monetary policy outlook in the second half of the year. And the stance of the Fed that will be the critical pillar for the broad risk on sentiment. We believe that the Fed will remain patient, letting the economy running off, carrying on some from the neutral stance that we got from the June meeting, to a modest hiking bias only later in the year or early in 2027. Expectation of AI productivity gain will allow the Fed to be cautious and slow in hiking, provided that inflation expectation don't become a challenge. In that scenario, the Fed behind the curve, uh, will allow the risk on environment to continue. The hikes from the ECB, BOJ, and the Bank of England are all expected to be moderate and not enough to delay the macro outlook. Risk here within our view will come from another inflation shock, which will require a more unpleasant growth and inflation trade off from Central Bank, but that is not our baseline. The geopolitical tension could linger in the background, however, stabilization in oil price with the reopening of the Strait of Hormuz will be less of a broad macro concern. Ending the year in terms of oil price at 80, 90 or 100, we clearly have implication in terms of the Central Bank response, but the removal of the tail risk will be an important factor for broad risk on sentiment. Finally, while we believe that the AI theme will remain the dominant story for risk asset, we acknowledge that the crowding of position could trigger either a flash crash or a correction, not enough in our view to derail the full narrative. Having said that, over time, investors will ask for the return on investment of the current AI capex cycle, but we don't expect that to become the compelling question in the second half of this year, where the computational demand story still remains strong. So, as long as the Fed stay patient, oil tail risk fade, and AI demand keeps delivering, the path of least resistance remain risk on until the next impression shock, or an AI crowding air pocket forces a reset.

Sam Azzarello: Amazing. Fabio, thank you so much for sharing your insights.

Fabio Bassi: Thank you so much for having me, Sam.

Sam Azzarello: All right, that wraps up our 2026 midyear outlook episode here on Making Sense. We hope you found the insights from our analysts helpful, and we wanna thank you for tuning in. For more market insights, be sure to visit jpmorgan.com/research.

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