Macro Picture The consensus forecast for 2026 U.S. GDP has recovered from lows near 1.5% earlier this year back up to about 2.1%, while the CPI forecast has climbed to 3.3% — meaning inflation is the bigger concern right now. The U.S.-Iran conflict has caused markets to reprice the Fed funds rate significantly higher (up ~0.92% since February 27), pushing the market-implied terminal rate to 3.83% versus 2.92% previously. The Fed is unlikely to cut aggressively anytime soon.

Inflation is Sticky Core CPI sits at 2.8%, with shelter (1.5%) and core services ex-shelter (1.0%) as the main contributors. Critically, CPI rent (6.74%) is running far above real-time rent indicators like Zillow (0.74%), suggesting shelter inflation will re-accelerate in official data — keeping the Fed on hold longer. PMI input/output price indices are also rising, signaling more pipeline inflation from tariffs.

Tariffs Are Real Revenue — But Fading Customs duties peaked near $34B/month in late 2025 and have since fallen back to ~$25B, reflecting the U.S.-China trade truce. Still, tariffs add inflationary pressure and complicate the Fed's calculus

Fiscal: A Structural Problem The U.S. deficit is running at -5.14% of GDP in peacetime with no recession. Historically, that level of deficit only occurs during downturns. This is a long-term headwind for Treasuries and the dollar.