Economic Pulse: May 2026
Monthly · Economics — By Shuhari — 31 May 2026
Executive Summary
Three months into the Iran war, the economic picture drastically changed along the way. The United States is (barely) holding together, while Europe is sliding into something that like a mild recession. The flash PMI data for May showed this divide openly:
- The eurozone composite PMI fell to 47.5 (worst since October 2023!), driven by a services sector contraction to 46.4.
- The same survey for the US showed manufacturing at its strongest since 2022.
A new chapter seems to have has opened in a stagflationary environment on both sides of the Atlantic while the new US FED chief Kevin Warsh is taking office.
The Iran War, Ceasefire, Blockade
The April 9th ceasefire never delivered what was briefly priced in and talks have been stalling through May. As of late May, WTI crude remains around $102 per barrel, up 53% from the $67 level the day before the war began. Gasoline in the US is up roughly 51.5% (!!) over the same period; diesel 49.8%; jet fuel 56%. Additionally, the fertiliser supply chain pipeline is disrupted, leading to food price implications that will continue to creep through.
The European Commission directed member states to accelerate gas storage fills, but doing so at current prices is expensive, inflationary, and politically contested.
The Core Problem Arrives
The April FOMC minutes, released in May, showed the full extent of the committee's anxiety: staff estimated March total PCE at 3.5% and core at 3.2%. Multiple members raised the possibility of a rate hike if inflation became embedded. Futures markets by mid-May had a December 2026 rate hike at over 50% probability.
In Europe, May flash CPI from the "Big Four" economies was elevated across the board. Germany at 2.6% (still beating the 2.8% expectation), France at 2.8%, Italy and Spain both higher, with Spain at 3.5% driven by transport costs.
New Fed Chair Inherits a Mess
The US Senate confirmed Kevin Warsh on May 13th. Warsh arrives having previously argued that AI productivity gains would be disinflationary and allow rate cuts. (January 2026) The world he has inherited CPI at 3.8% and the FOMC that voted 8-4 at its last meeting where the debate has shifted from "when to cut" to "whether to hike."
His stated preference for lower rates is in direct conflict with what the data currently shows. The June FOMC is the most consequential monetary policy event of 2026.
What Does It Mean for Us?
The protective Correlation Breakdown Detector, the Oil Shock Circuit Breaker and the Dynamic Safe Haven Selection would have been severely tested by the period from February 28th to today. Capital remained unallocated through the last 8 weeks.
Find below the allocation and research watchlist for the updated Factor Book and Alpha Book sleeves. (Second Alpha sleeve is on its way, Post Earnings Drift in nature.) Details about the allocation in The 2026 Refactor and its linked subsequent posts.
Factor Book
The factor book holds a basket of UCITS ETF sleeves: us_market, us_momentum, us_quality, us_value, us_size, us_low_vol, macro_regime, xasset_trend
Each of these have a target weight of NAV (40/20/10/10/5/5/5/5), and the daily runner places orders to keep realized weights aligned with those targets. It deliberately harvests known risk premia (equity-style factors, macro regime, cross-asset trend) rather than chasing alpha, so it's judged on Sharpe, drawdown, and exposure fidelity to the factor model.
| Side | Symbol | Purpose |
|---|---|---|
| SELL | SXR8 iShares Core S&P 500 | factor_book/us_size |
| SELL | SXR8 iShares Core S&P 500 | factor_book/us_quality |
| SELL | SXR8 iShares Core S&P 500 | factor_book/us_momentum |
| SELL | SXR8 iShares Core S&P 500 | factor_book/us_value |
| SELL | SXR8 iShares Core S&P 500 | factor_book/us_low_vol |
| BUY | QDVA iShares Edge MSCI USA Momentum Factor | factor_book/us_momentum |
| BUY | EIMI iShares Core MSCI EM IMI | factor_book/xasset_trend |
| BUY | SXR8 iShares Core S&P 500 | factor_book/xasset_trend |
| BUY | IGLN iShares Physical Gold ETC | factor_book/macro_regime |
| BUY | IDTM iShares USD Treasury Bond 7-10y | factor_book/macro_regime |
| BUY | PCOM WisdomTree Broad Commodities | factor_book/xasset_trend |
| BUY | QDVB iShares Edge MSCI USA Quality Factor | factor_book/us_quality |
| BUY | ZPRR SPDR Russell 2000 | factor_book/us_size |
| BUY | IBCK iShares Edge S&P 500 Min Vol | factor_book/us_low_vol |
| BUY | QDVI iShares Edge MSCI USA Value Factor | factor_book/us_value |
| BUY | SXR8 iShares Core S&P 500 | factor_book/us_market |
| BUY | SXR8 iShares Core S&P 500 | factor_book/macro_regime |
Alpha Book
The alpha book runs discretionary and systematic strategies whose job is to produce residual return that survives a HAC t-stat ≥ 2.0 hurdle against the shared factor model before it can deploy capital.
Bias description: Contraction regime, Bull market trend, inflation rising → neutral / low gross (low conviction, shrinking gross).
- Targets: Long defensives, low-beta. Short cyclicals, high-beta, leveraged names. Long Energy, Materials, real assets, value over growth. Short long-duration unprofitable growth.
- Raise cash: increased conviction thresholds result in increased cash balance until Bias changes.
Screening for Timing/Signal, Catalyst and Fundamentals (in regime context) "Green" on: ACGL, AIG, APA, APOS, AR, BIPC, BLLN, COF, COIN, CPB, CRCL, CVNA, DVN, EG, FANG, FNF, GPN, HALO, LEGN, LNG, MTZ, ORA, OVV, PTCT, QXO, RGA, RGEN, RNR, STL, SYF, SYM, TPL, TSLA, VG, VRT
These will go into review and qualitative analysis for a 20 - 60 day timeframe options structuring. Update on results coming through individually.
Data Sources:
BLS. Consumer Price Index (April 2026, released May 12, 2026)
BLS. Employment Situation (April 2026, released May 8, 2026)
Federal Reserve. FOMC Minutes (April 28-29, 2026, released May 21, 2026)
S&P Global. US Manufacturing & Services PMI Flash (May 2026, released May 21, 2026)
S&P Global / HCOB. Eurozone Flash Composite PMI® (May 2026, released May 21-22, 2026)
Eurostat / National Statistics Offices. May Flash CPI — Germany, France, Italy, Spain (released late May 2026)
US Senate. Kevin Warsh Confirmation Vote (May 13, 2026)
Center for American Progress. Iran War Energy Price Analysis (May 2026) CEPR / VoxEU. Kilian et al. — Quantifying the Impact of the Iran War on US Inflation (April 2026)
Conference Board. Euro Area Economic Forecast (May 2026)
Trading Economics. WTI Crude, Brent, EUR/USD price data (May 2026)
ECB. Economic Bulletin Issue 3, 2026