Market Recap – Q2 2026, “Regime Change”

Fed Chairman Kevin Warsh took the podium for the first time in June, with a more hawkish tone than expected. The dot plot showed nine of 18 officials projecting a rate hike by year-end, up from zero in March. One projection, Warsh's own, was missing from the chart. The policy statement ran roughly 130 words, down from over 300 in recent meetings, and dropped forward guidance. Warsh's press conference was also shorter than his predecessor's.

The BEA third estimate of Q1 Real GDP was 2.1%, with business investment and federal nondefense spending contributing prominently. Unemployment was roughly unchanged versus a year ago, and the unemployment level fell by 145k to 7.1mm. Headline CPI eased to 3.5% in June from 4.2% in May, falling 0.42% MoM, the first negative print in six years. The decline was led by a 9.5% MoM drop in energy commodities following the U.S.-Iran ceasefire. The conflict has since resumed and reignited both oil prices and inflation expectations.

The FOMC maintained the target range for the federal funds rate in Q2 at 3.50%–3.75%, citing elevated inflation from the tail end of the Iran war, while the job market showed signs of improvement. Additional reserve management purchases decelerated from roughly $25 billion to $10 billion monthly during the second quarter.

The yield curve flattened over the second quarter. Short- and intermediate-term yields rose while longer tenors remained anchored around ~5%.

Relative performance among spread sectors varied over the second quarter. High yield outperformed in corporates over the period. The risk premium over like-maturity Treasurys on BBB-rated corporate bonds within the Aggregate decreased from 110 to 95 bps. Corporate bonds outperformed structured securities in Q2. Among securitized assets, asset-backed securities outperformed Agency MBS and CMBS. 

Expectations for monetary policy flipped through the course of the war in Iran. Federal funds futures indicate 0.34% in expected rate hikes by year end 2026.