Market Talk: ‘Optimistic’ on the US economy through 2028

Added: 2026-05-11

[00:00:00]One more missed offramp in the Middle East, and markets still aren't panicking.

[00:00:07]Another weekend, another failed attempt at de-escalation between the US and Iran, and markets are still trying to decide whether to shrug it off or brace for something bigger. President Trump has rejected Tehran's latest peace proposal, as investors are heading into a pivotal week for inflation and global trades. Well, Paul Hollingsworth is head of developed markets economics at BNP Paribas. So, Paul, markets seem reluctant to price in a major escalation after the latest rejection of peace proposals on both sides. Is that complacency? Markets seem to be supported by the the prospect, even if elusive, of a resolution to the conflict, solid earnings momentum in the US, and relatively resilient economic data as well. Now, this uneasy tension between the optimism of markets and the frozen geopolitical situation can't continue forever. At some point, there needs to be a reconciliation. Either some diplomatic resolution needs to be found that puts the global economy on a pathway of normalization, or the disruption continues, and and there will be a more material economic effect that will be difficult for the markets to look through. Now, our base case is the former. We think that we will eventually get on this pathway of of normalization, but every day the conflict and the disruption goes on, the closer it takes us to that scenario of a much more significant adverse impact on the global economy. Let's talk about those scenarios, and oil has stayed surprisingly contained so far. But if disruption around the Strait of Hormuz drags on, what's the catalyst for sharp prices? So, the path of least resistance for oil prices is absolutely higher here.

[00:01:36]Oil prices have been somewhat contained in part due to some of the circuit breakers that were present, things like oil reserves that were able to be released, but of course, these things are inherently finite in nature. So, as these things get depleted at some point, the reality of physical shortages will come to the fore. We're not there yet, but again, every day the disruption continues, the closer it takes us to that point. So, again, the path of least resistance is is definitely energy prices higher if the disruption were to continue.

[00:02:05]>> Well, let's look back on Friday's payrolls numbers now, and despite higher energy prices, the labor market's still holding up well. So, what's cushioning the economy right now? I think there are a few things that are helping the US economy at the moment. The first would be accommodative financing conditions.

[00:02:19]Business sentiment also remains relatively steady. And of course, in the background, we have this ongoing productivity boom, which in part I think can be traced to the adoption of artificial intelligence. So, all of these things combined are contributing to what is a relatively resilient growth picture at the moment, and we think that that is going to continue. We have a optimistic outlook for the US economy throughout the next 2 years. Well, investors now turn to this week's US inflation data for clues on the Fed's next move. So, what are you expecting from the numbers? We're looking for a relatively hot print for inflation again as we see a combination of high energy prices driven by the conflict interact with relatively sticky non-shelter services prices and some ongoing tariff pass-through as well. So, we're looking for a slightly above consensus 0.4% month-on-month increase in core CPI. And coming back to the point in that the US economy remains resilient, our outlook for this year is also one of pretty sticky inflation. So, you did mention the tariff pass-through there in the inflation numbers, but after the federal trade court has ruled Trump's blanket tariffs unlawful, will trade continue to weigh on the inflation outlook? So, while recent court rulings add a little bit of uncertainty to the tariff outlook, I think it's quite clear that we're not going back to a low tariff environment. So, we think that tariffs are going to remain something that is important for the inflation outlook. I think there is a question about why we've not seen a lot of this come through so far, but for us, this is a question of timing rather than quantity.

[00:03:48]And certainly during periods of 2025 when there was a lot of uncertainty about the demand backdrop. Our sense is that firms were unwilling to make large changes to their prices.

[00:03:58]But as things have gone on and we've already discussed the resilience of the US economy, we think that firms are going to be more willing to pass on some of those costs. So we think this year that ongoing tariff pass through, even if gradual on a month-by-month basis, is going to remain very relevant for the inflation outlook. So finally, Paul, let's end with President Trump heading to Beijing this week. His aim is to cement the trade truce agreed in South Korea last October, but what's likely to dominate those talks? Along with the very well-known issues of trade and technology that I think will remain very important for for the dialogue, I think investors are in particular looking to see if the meeting has any repercussions for the ongoing situation in the Middle East.

[00:04:38]That was Paul Hollingsworth from BNP Paribas. Don't forget you can watch more videos on reuters.com.