Weekly Global Economic Update

Week of May 11, 2026

• Why haven’t oil prices risen more?
• Investors become more pessimistic about US inflation
• US economic indicators offer conflicting signals
• US trade policy is back in the news

Why haven’t oil prices risen more?

• In previous economic updates, I had written about how the world could face a serious shortage of oil, if supplies flowing through the Strait of Hormuz remain severely constrained, once the oil that was in transit at the start of the Middle East conflict reaches its customers. To fill that gap, demand will have to fall to the level of supply, which will likely require a substantial increase in the price of oil. Well, the oil supplies in transit have mostly reached their destinations. And, yet, the price of oil, while elevated, has not nearly risen to the level required to suppress demand adequately. Why?

The answer lies in the fact that countries have been dipping into their crude-oil reserves to an extraordinary degree since the conflict began. S&P Global Energy reports that, in April, global stockpiles of crude fell by 200 million barrels—or roughly 6.6 million barrels per day. An analyst at JP Morgan estimates that, as of April 23, 2026, 280 million barrels of reserves had been tapped since the crisis began. The same analyst estimates that, although there are about 8 billion barrels of crude in reserve, only about 580 million barrels are easily accessible.

Meanwhile, the International Energy Agency estimates that, with the Strait of Hormuz effectively closed, and with some offsetting increases in production and diversion of Gulf oil, the world’s supply of oil had declined by 11.1 million barrels per day in March. This was due to a decline of about 13 million barrels per day in the volume of oil being shipped through the strait, offset by increases elsewhere. It also estimates that global demand for oil has fallen by 4 million barrels per day.

Quickly doing the math, it appears that the gap between supply and demand is roughly being offset by the release of reserves. That, in turn, explains why the price of oil has not suddenly shot up dramatically. Yet, if the Strait remains closed for an extended period, reserves will ultimately be used up and, consequently, the price could rise sharply. An analyst at S&P Global Energy said that “an inevitable market reckoning is coming.”

One result of the release of reserves is that they now stand at their lowest level in eight years, according to Goldman Sachs. It said that, currently, there are only 45 days of supply of refined products in stock. In Europe, there is concern about the low supply of jet fuel. An analyst at Goldman Sachs said that “the worst of the crisis is ahead of us."

Investors become more pessimistic about US inflation

• Investors are becoming increasingly concerned about the potential for higher US inflation stemming from the crisis in the Middle East. This is evident in the rising breakeven rate (a measure of bond investor expectations for inflation), futures market expectations regarding US Federal Reserve monetary policy, and bond yields. Much of it appears to be coming from a fear that little progress is being made in reducing tensions around the Strait of Hormuz and that, consequently, oil prices could rise further.

Oil prices have been extremely volatile in the past two weeks, often moving based on news that changes investor expectations about the potential duration of the crisis. At the least, the situation is highly uncertain and does not yet suggest a high likelihood that the Strait of Hormuz will soon be safely reopened.

With investors seeing a significant probability of a prolonged disruption of the strait, they are now expecting relatively high inflation. In the United States, the five-year breakeven rate (which is a measure of bond investor expectations for average inflation over the coming five years) has increased from 2.4% on the day before the conflict began to 2.69% recently—the highest level since early 2023.

The expectation of high inflation has influenced expectations for monetary policy. As of the end of last week, futures markets were pricing a 74.5% probability that the Fed’s benchmark interest rate will remain unchanged for the rest of 2026. The probability that the Fed will hike the rate this year was 14.9%, up from 0.8% a month earlier. And the probability of a rate cut this year is now 10.6%, down from 21.5% one month earlier. It appears that many investors have become significantly more pessimistic about inflation in the past few weeks. Moreover, they appear to be placing less weight on incoming Fed Chair Warsh’s previously stated view that interest rates ought to be lowered. Investors expect that sentiment to be temporarily set aside until the Middle East conflict is over.

The result of such expectations for high inflation and tight monetary policy has been a rise in the yield on the US Treasury’s 10-year bond, which recently hit 4.4%—up from 3.95% just before the start of the conflict. It is now at its highest level since July 2025. Elevated bond yields, if sustained, will likely weigh on credit-market activity, transaction volume, and the US housing market.

US economic indicators offer conflicting signals

• It was widely expected that the conflict in the Middle East would have negative consequences for the US economy. However, based on the employment reports for March and April, the economy still appears to be doing well. On the other hand, job growth in April was concentrated in just a handful of sectors, suggesting that the economy is not generating across-the-board job growth. Let’s look at the details:

The US government publishes a monthly report on employment, based on two surveys: one is a survey of households and the other a survey of establishments. The establishment survey found that, in April, 115,000 new jobs were created, down from 185,000 in March. Both were strong numbers, especially compared to the weak pace of job growth in 2025.

However, job growth in both months was relatively concentrated only in a handful of industries. In March, half of the growth in employment was attributable to health care and social assistance. In April, all the job growth was attributable to just three categories: health care and social assistance, courier and messenger services, and retail trade. All other categories had either very low or negative job growth. For example, employment fell in April in manufacturing, information services, and financial services, and increased by only 7,000 in professional and business services. Federal government employment fell as well.

Meanwhile, the report also found that workers’ average hourly earnings were up 3.6% in April from a year earlier. The figure stood at 3.4% in March. The April figure was the second-lowest increase in earnings since May 2021. This comes at a time when inflation is modestly accelerating, which means that real (inflation-adjusted) earnings are likely decelerating. If, in the coming months, inflation rises further due to the conflict in the Middle East or due to other reasons, it will likely mean a loss of purchasing power for US households, which, in turn, could contribute to slower economic growth.

The separate survey of households, which also measures self-employment, found that the size of the labor force declined in April and that employment declined even more. The labor force participation rate fell slightly, hitting the lowest level since September 2021. Plus, the unemployment rate remained steady at 4.3%. This report signals a softening in the job market, especially as evidenced by the low participation rate.

The US government also reported on labor productivity: Labor productivity (output per hour worked) increased at an annualized rate of 0.8% between the fourth quarter of 2025 and the first quarter of 2026. This was the lowest rate of growth recorded since the first quarter of 2025. On the other hand, labor productivity was up 2.8% from a year earlier, suggesting strong growth. Most of this growth took place in the second and third quarters of 2025, which, in turn, was mostly due to rising productivity in the technology sector. Productivity trends are best assessed over many quarters. Thus, the deceleration in the first quarter is not, by itself, sufficient to suggest a change in direction.

• While the jobs report does not yet suggest that the conflict in the Middle East is causing the economy to weaken, the latest report on consumer sentiment does suggest some concerns. The University of Michigan’s index of consumer sentiment fell to a record low in April—slightly below the previous low reached in June 2022. That period is similar to the current one in that both have witnessed relatively high prices of gasoline. Moreover, the University of Michigan said that “about one-third of consumers spontaneously mentioned gasoline prices and about 30% mentioned tariffs. Taken together, consumers continue to feel buffeted by cost pressures, led by soaring prices at the pump.”

It should be noted, however, that indices of consumer sentiment are not always a good predictor of consumer behavior. The index in March was also historically low, but the US government reported that retail spending was relatively healthy.

• Since the start of April, the S&P 500 index of US equities has increased by more than 12%. Yet, half of that growth is attributable to the shares of just five technology companies: Alphabet, Nvidia, Amazon, Broadcom, and Apple. Excluding those five companies, the S&P 500 increased only 6%. Moreover, if the 500 companies on the S&P index are weighted equally rather than by market cap, the index has not gone up at all since the start of the Middle East conflict began in late February. This level of concentration is not typical.

It seems equity investors are betting that the conflict in the Middle East will not materially undermine the strong earnings seen in the technology sector. Meanwhile, forecasts for earnings at non-tech companies have been downgraded by analysts. The problem, however, is that, if the conflict in the Middle East is prolonged, thereby potentially leading to higher oil prices, it could result in tighter monetary policies in major economies. That, in turn, would likely mean higher bond yields and higher borrowing costs for companies. Given that the massive investment by tech companies in data centers is largely funded by debt issuance, this could have a negative impact on the tech sector.

US trade policy is back in the news

• The crisis in the Middle East has, for now, successfully diverted attention from trade disputes, which are still continuing. Recently, the United States announced that the tariff on imported light vehicles (automobiles and sport-utility vehicles) will be raised from 15% to 25%. Vehicles assembled in the United States by EU companies would be exempt from the increase.

This appears to disrupt the so-called Turnberry trade deal that the United States and European Union reached last year. Recall that the European Parliament’s ratification of that deal was delayed because of concerns around US interest in Greenland. Ultimately, the deal was ratified. The US move comes while the country announced the withdrawal of 5,000 troops from Germany, threatened to pull troops out of Spain and Italy, and chose not to send a group of long-range missiles to Europe that were set to be transported. This reflects US frustration with Europe for not supporting US efforts with respect to Iran. It will likely speed up European plans to boost defense spending.

• Although the United States continues to impose a 50% tariff on imported steel, aluminum, and copper, it will now cut the rate on derivative products of those metals from 50% to 15%, provided that a product’s metal content is less than 15% by weight. This is likely to affect the pricing of small products that contain modest amounts of metal. A good example is dental floss.

Meanwhile, if a derivative product contains more than 15% metal by weight, the tariff will be cut to 25%. However, that tariff will apply to the full value of the product rather than just the metal content. Thus, an imported washing machine will now face a tariff of 25%. Previously, there was a 50% tariff on just the metal content of the washing machine. Finally, imported metal products that use American steel or aluminum will be subject to a 10% tariff.

The complexity of these rules and the changes being made to them demonstrate the challenge of trade restrictions: They create an incentive for companies to game the system by optimizing their supply chains according to changing trade rules. This gets in the way of optimizing supply chains to achieve low cost, high speed, and high quality. The result of such rules will likely be lower productivity growth than would otherwise be the case. In the short term, however, uncertainty about trade rules can have a stifling effect on the willingness of companies to invest in their supply chains.

Week of May 04, 2026

• Oil prices rise, and so do equity prices
• Central bankers choose to wait and see
• What will AI do to our work and leisure choices?

Oil prices rise, and so do equity prices

• Last week, the price of Brent crude hit US$126 per barrel—the highest in four years—before reverting to a lower, but still elevated, level. My view is that oil prices are on a knife’s edge and could move materially in either direction, depending on whether the Strait of Hormuz is opened soon or not. The reason is that, if the strait is reopened quickly and credibly, market concerns about supply disruption should also ease. In that case, the price will likely gradually decline as supply chains are reactivated and oil starts to flow to its customers.

On the other hand, if it becomes clear that the strait is not likely to reopen soon, the world might have to contend with a physical shortage. The International Energy Agency has estimated that global supply is down by about 11 million barrels per day while demand is down about 4 million barrels per day. Although there can be a temporary positive impact from dipping into reserves, those reserves can be used up quickly. If that happens, there could be a significant gap between supply and demand that can only be resolved by a decline in demand. That, in turn, typically requires a higher price to discourage consumption of oil. And that is starting to happen.

Investors understand that, if the strait remains closed for a prolonged period, demand for oil must decline. The problem is that demand for oil is not very sensitive to price movements. If the price of gasoline rises, a person who must drive to work and who has no public-transport alternative will likely continue driving to work. Thus, for demand to fall sufficiently, the price of oil must rise high enough to shift consumer and business behaviors. How far that will be is hard to estimate. Some estimates suggest a price of more than US$200 per barrel. If that occurs, it could lead to a sharp rise in global inflation, a shift toward tighter monetary policy, a significant decline in consumer purchasing power, and possibly contribute to recessions in major economies.

Although the price of crude oil is rising again, it is notable that US equity prices are still moving upward. A disconnect appears to have developed between oil prices and equity prices as investors seem to be ignoring the conflict in the Middle East and focusing on artificial intelligence. 

Despite the rise in oil prices, US equity investors remain sanguine: They appear to be betting that, even if the oil-price situation contributes to an economic slowdown, it will not likely undermine the continued rollout of AI. Moreover, they seem confident that the AI rollout will be profitable. Among the 500 companies listed on the S&P 500 index, the best-performing cohort in April has been information technology companies. The second best was communication services companies. Either this is a bubble or investors have dramatically revised their profitability expectations from their AI investments.

On the other hand, if oil prices rise further, thereby creating a far more inflationary environment, and assuming that the US Federal Reserve responds by tightening monetary policy, the result will likely be a rise in long-term borrowing costs. That, in turn, could have negative consequences for the ability of tech companies to service their large and growing debts. In that case, equity investors might downwardly revise their expectations regarding tech-company profitability, which could result in sharp declines in valuations.

Central bankers choose to wait and see

• At its April meeting, the 12-member Federal Open Market Committee of the US Federal Reserve left the benchmark interest rate unchanged. However, the decision involved a high degree of division, with four members dissenting—the highest since 1992. One member voted to cut the benchmark interest rate by 25 basis points. Three others agreed to keep the rate unchanged but disagreed with the Fed’s statement, which they viewed as leaning toward future easing. Specifically, those three members took issue with the following sentence: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks."

This was the last decision by the Federal Open Market Committee under the leadership of US Fed Chair Jerome Powell. It appears highly likely that the US Senate will soon confirm Kevin Warsh as the next chair. He will enter at a time of uncertainty and division within the Federal Reserve. In its statement, the Fed noted that “developments in the Middle East are contributing to a high level of uncertainty about the economic outlook. The Committee is attentive to the risks to both sides of its dual mandate.”

Meanwhile, the European Central Bank chose to leave its benchmark interest rate unchanged on the same day the European Commission reported that, in the eurozone, inflation accelerated in April and real economic growth was weak in the first quarter of 2026. Although headline inflation surged to 3% percent in April from 2.6% in March and 1.9% in February, core inflation (which excludes the impact of energy and food prices) fell in April. Thus, underlying inflation remained relatively tame, and so far, not yet affected by the energy-price shock. In addition, real gross domestic product was up just 0.1% in the Eurozone between the fourth quarter of 2025 and the first quarter of 2026, indicating weakness. As such, the European Central Bank chose a wait-and-see approach to monetary policy. Christine Lagarde, president of the European Central Bank, said that “inflation is in a good place.” Thus, tightening did not yet appear to be necessary. Still, futures markets are pricing in possible interest-rate increases later this year.

• Not surprisingly, the Bank of Japan left its benchmark interest rate unchanged. It had previously signaled an intention to gradually tighten monetary policy in the face of higher-than-desired inflation. Moreover, it was keen to normalize monetary policy after a prolonged period of abnormally low interest rates. Yet, the crisis in the Middle East appears to have has gotten in the way. Although the conflict will likely boost inflation, it could also cause slower economic growth, which is a concern for the central bank. Thus, it has also taken a wait-and-see approach.

Still, the decision of the Bank of Japan Policy Committee was far from unanimous. Members voted 6 to 3 to keep the rate unchanged. The dissenters, however, wanted to increase the benchmark interest rate from 0.75% to 1%.

Meanwhile, Governor Ueda said that he does not want to see the central bank fall behind the curve. Yet, he also said that “given the high level of uncertainty around the conflict in the Middle East, the likelihood of achieving our forecasts has declined.” He was alluding to the central bank’s goal of bringing inflation toward its 2% target. He said he “wants to spend a little more time scrutinizing how the Middle East conflict affects the economy and prices, and whether the risk to growth and inflation could change.”

Governor Ueda also said that the Bank of Japan needs to determine if the inflationary impact of higher oil prices will be a temporary phenomenon, in which case, longer-term inflation is not a concern. On the other hand, he said that “if those shocks feed through into second-round effects on underlying inflation, interest rates will need to be raised.” Investors now see a strong likelihood of the Bank of Japan increasing the benchmark interest rate at its next meeting in June.

Japan currently faces inflation that is higher than its central bank’s target. Moreover, Japan is especially vulnerable to events in the Middle East, given the large volume of crude oil it imports from that region. Yet, the vulnerability is not just about inflation. The Bank of Japan said that “the rise in crude oil prices reflecting the impact of the situation in the Middle East is expected to push down corporate profits and households’ real income.” In other words, there is a risk of both inflation and slower economic growth, which creates a dilemma for the central bank.

What will AI do to our work and leisure choices?

Ian Stewart, chief economist of Deloitte UK, discusses the potential economic and societal impact of AI. He suggests that AI will likely not replace the role of humans.

Could we be approaching a world that John Maynard Keynes imagined in his 1930 essay, “Economic possibilities for our grandchildren,” in which he speculated that technology would solve the “economic problem” and leave his descendants working a 15-hour week?
 
If the past is a guide, the answer is probably “no.” History suggests that people, society, and institutions have a remarkable ability to absorb and exploit new technologies without abolishing work. Over time, technological change has been associated with growing—not falling—employment. 
 
First, and most importantly, human desires are not fixed: A static view imagines a list of progressively more difficult tasks that machines conquer until nothing remains for humans to do. That has not been the experience. Mass mechanization destroyed jobs on a vast scale, collapsing the number of people needed to produce the necessities of food and shelter. But instead of universal idleness, rising incomes created new jobs elsewhere, providing everything from health care to holidays. When one set of wants is satisfied, new wants appear. In the modern world, the “economic problem” is increasingly not one of material scarcity; it is the open-ended nature of human aspiration.
 
Second, those aspirations are unlikely to be met fully by machines. Humans value, and want to be with, others. Even if AI systems become technically superior, it does not follow that people will prefer machine-only provisions. The doctor, lawyer, or waiter does more than just process and act on information. They judge mood, and interpret, persuade, and encourage. Dario Amodei himself has noted that although AI has become highly capable at reading scans, radiologists have not disappeared because part of the role involves explaining the results to patients and planning future care. 
 
Third, technology, by raising productivity and cutting prices, can bolster demand. If AI reduces the cost of, say, making cat videos for social media, we will likely consume more of them. Cheaper computing did not eliminate work in the tech sector; it helped create whole new industries. The same holds in travel, communications, health care, and finance. If AI makes a vast array of services cheaper, we may consume more of them and, if history is any guide, will create new complementary jobs, many in roles that are not yet imagined. 
 
Fourth, technology often falls short of its theoretical potential. Sometimes the frictions and hassles associated with using tech are just too great. Often the tech underperforms humans. The QR code menu is one example. During the pandemic, many restaurants switched to using QR codes to reduce human interaction and the risk of infection. The technology works—it is cheap and it reduces labor. Yet, five years later, the human waiter still rules the roost in most restaurants because ordering food is also a social process and part of the experience of eating out.

Or consider the role of the barista: Machines make excellent coffee. Yet customers continue to pay for staffed cafés because they prefer dealing with a human being and like the ambience and reassurance that comes from having staff around. Businesses do not just maximize efficiency to minimize cost; they optimize across an array of factors. AI will face the same frictions, especially in sectors where errors are costly or where consumers prefer dealing with humans. 
 
This is not to be complacent about the effect AI is likely to have on the labor market, however. Disruption is already happening, especially in some entry-level jobs, including software engineering. Tasks will be automated—jobs will be lost and many more will change. The adjustment could come quickly, especially for structured, routine, cognitive work. But the idea that better machines mean the end of human economic usefulness is a stretch. AI will change the nature of work. It is much less clear that it will end the human desire to work for, and with, others.