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Market Perspectives: Playing for time

Anthony Willis

Senior Economist, Multi-Asset Solutions team

Key Takeaways

Markets appear to be entering a more measured phase after a volatile first half of 2026.
Fears of aggressive central bank tightening have eased as oil prices have moved back from recent highs.
Inflation remains elevated, but there is limited evidence so far of a broad-based second wave.
Central banks are likely to stay patient and data-dependent as they assess the durability of price pressures.
A less hostile policy backdrop and resilient growth could support a more constructive market environment in the second half of 2026.

Transcript

After an intense first half, financial markets appear to be entering a more measured phase. The second half of 2026 is likely to hinge on the interaction between inflation, central bank policy and the resilience of global growth, against a backdrop already tested by geopolitical disruption.

The outlook for central banks is shifting again. Earlier this year, markets feared policymakers would be forced into more aggressive rate rises as oil prices spiked following the US-Iran conflict. Those fears have eased as oil has moved back towards $70 a barrel, reducing near-term pressure from energy markets.

So far, the inflation impulse does not point to a broad-based second wave. Headline inflation has risen, with US inflation above 4% and UK inflation above 3%, but the underlying data do not suggest the persistent acceleration seen in 2022. While energy has lifted headline measures, there is limited evidence that it is feeding decisively into wider price-setting behaviour.

That matters for investors. A few months ago, the risk was that central banks would be pulled into another tightening cycle. That now looks less likely. Inflation remains too high for comfort, but the probability of aggressive rate increases has fallen as the oil shock has faded and the economy has continued to absorb recent disruption.

Market pricing reflects this shift, although expectations remain fluid. In the US, markets still price one possible Federal Reserve rate increase this year, but not until December, with only a modest total move implied for 2026. The first meeting under Kevin Warsh’s leadership will therefore be closely watched as investors look for clarity on how the new Fed chair will steer policy when inflation is elevated but growth has proved more resilient than feared.

In the UK, expectations have shifted even more sharply. Markets began the year looking for Bank of England rate cuts, then moved to pricing multiple hikes as inflation concerns intensified. Today, they price only one further increase, and not until next March. UK inflation may rise again in the near term as the energy price cap feeds through, but the key question is whether that proves temporary or becomes embedded. For now, the balance of evidence suggests inflationary pressure should ease again by year end.

The European Central Bank has already raised rates, and markets expect one further move. Even there, expectations could adjust if the data continue to show that the energy shock is not creating a more persistent inflation problem. The Bank of Japan remains on a different path as it normalises policy, with another rate rise possible by year end.

Across the major central banks, the common thread is patience. Policymakers are likely to remain data-dependent, watching for signs that energy-related price rises are spilling into broader inflation. For now, the lack of a clear second-round effect gives them room to wait rather than act pre-emptively. Policy is unlikely to become easy, but the backdrop may be less hostile than markets feared earlier in the year.

For markets, that is important. A less threatening central bank backdrop would be supportive, particularly if economic resilience persists. Growth has been dented by the past three months, but not enough to undermine the view that the global economy can still expand at a decent pace this year. If the geopolitical shock remains contained and confidence stabilises, growth forecasts could even carry some upside risk.

The key for the second half is balance. Investors should stay alert to the risk that inflation proves stickier than expected, particularly if oil prices rise again or domestic price pressures broaden. But the central case is more constructive than it was at the height of recent market anxiety. If oil prices continue to normalise, inflation pressures should ease and central banks should have less need to tighten aggressively. In that environment, the outlook remains positive, and markets may find that the second half is less about reacting to shocks than playing for time while the data provide a clearer signal.

6 July 2026

2026年 July 06日

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Market Perspectives: Playing for time

Key Takeaways

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Market Perspectives: Playing for time

Market Perspectives: Postcard from Milan: What’s in store for H2?

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Market Perspectives: Playing for time

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Market Perspectives: Playing for time

Market Perspectives: Postcard from Milan: What’s in store for H2?

Market Perspectives: Postcard from Switzerland: Should markets be moving more?

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