Headline inflation is up due to food/energy, but core inflation expectations unknown. Consumer sentiment indicators are declining, yet actual spending data (air travel, retail sales, hotel demand) remains strong. Long-term inflation expectations from Michigan survey are well-anchored and stable.

Divergence between what consumers say and what they do suggests duration of shock not long enough for demand destruction.

Markets see current inflation as transitory/temporary. Fed follows PCE (rising even without oil), not just CPI. Bloomberg survey shows economists expect inflation rise but still two cuts this year, while recession probability increased from 25% to 30%.

Creates bifurcated distribution: worry about extended high inflation OR harder landing. This is the Fed's challenge - balancing inflation weight vs. labor market deterioration risk.

Low-hire, low-fire due to energy shock (previously trade war). Companies cautious because uncertainty about shock duration and oil prices. Jobless claims remain low.

Rational corporate response to uncertainty.

Next Friday's jobs number critical for rates and credit. Labor market data taking more prominent role because inflation says hike but labor market might show cooling, especially with immigration restrictions weighing on labor supply.

Fed's SEP revised up inflation and GDP, but labor market softness would make decisions more challenging.

Current Middle East situation not sustainable for years or even months. Expect resolution, with political considerations from Iran and US ahead of midterm elections. Outcome likely more GCC connection with US/Europe and more stability.

Investors should take long-term perspective.

$10T Treasury refinancing + $2T budget deficit + $2T corporate IG issuance = $14T total IG supply (50% of US GDP). This creates upside pressure on rates (front and long end) and upward pressure on credit spreads.

Combined with inflation pressures from tariffs, oil, strong economy, and now massive supply.

Current high yields look interesting if oil prices come down and economy slows. Both base rates and credit spreads are temporarily high, making all-in yields in IG and parts of HY look juicy.