US growth is at its softest since 1Q25: US economic sentiment has continued to soften despite a positive blip at the start of the year. Recent economic indicators suggest that momentum in the US economy has weakened, with growth now appearing to be at its slowest since the first quarter of 2025. The increase in gasoline prices to the levels in two years is highest likely to add fire to the stagflationary debate facing the US economy. That said, in our base case we see the current energy price shock as transitory and the next move by the Fed likely to be a cut rather than a hike and that the US economy will continue to grow to above 2% by YE26e.

BBVA FCI back near critical levels: our BBVA Financial Conditions Index (FCI) has recently jumped to its highest levels since April last year. While we are still in negative territory, the current Middle East tensions have the potential to push it higher into positive territory from the current reading of -0.1x. Similar to our growth outlook, our Financial Conditions Index is also pointing to some near-term caution.

BBVA Flow Focus: Interestingly, we have seen marginal outflows from EM equities and substantial inflows into EM bond funds over the last twelve months. This shift in flow momentum in favor of EM bonds has bolstered the outperformance of our FX carry strategies. The all-in yield in EM bonds are still attractive, and investors have reversed their outflows in the last five years, and given the persistent yield differential, we expect the flow momentum to continue in favor of EM bonds thus helping our FX carry strategies.

Our framework shows a strong momentum score in favor of FX trend strategies indicating that trend signals in major currency markets are gradually strengthening. In an environment with a continued uptick in our Financial Conditions Index, we believe the strong momentum in FX trend strategy could continue. FX carry and trend strategy have recently outperformed the rest in terms of short-term Sharpe ratios despite the uncertain market environment. The Credit trend has underperformed recently due to tensions in the Middle East, although we remain constructive on credit markets in the remainder of the year based on solid fundamentals combined with attractive all-in yields.

Trade of the month: FX Trend – this strategy benefits from some of the same fundamental drivers that underpin our preference for FX Carry. Flow momentum remains the key determinant of trend strategy performance and has continued largely uninterrupted over the last twelve months. Given the still-elevated interest-rate differentials between EM and DM economies, we believe these flows could continue despite the geopolitical tensions in the Middle East.