📈 Key developments:
• Headline inflation rose to 3.2% in May, exceeding the 3% mark for the first time since September 2023.
• Energy prices surged 10.9% year-on-year, remaining the primary driver of inflationary pressure.
• Core inflation, which excludes volatile food and energy prices, climbed to 2.5%, surpassing market expectations of 2.4%.
• Financial markets are now pricing in a 95% probability that the European Central Bank (ECB) will raise interest rates by 25 basis points at its upcoming meeting.

Why does it matter?

The return of inflation above 3% complicates the ECB’s policy path. While economic growth across the Eurozone remains fragile, the resurgence of both headline and core inflation indicates that underlying price pressures have not been fully contained.

At the same time, EU policymakers are reportedly considering allowing member states additional budget flexibility equivalent to around 0.3% of GDP for energy-related expenditures. While such measures may help households and businesses cope with elevated energy costs, they could also add fiscal stimulus at a time when monetary policy is attempting to cool inflation.

Takeaway:

The ECB faces a delicate balancing act. Persistent inflation argues for tighter monetary policy, but higher borrowing costs risk further slowing economic activity. The combination of renewed energy-price pressure and potential fiscal support measures may keep inflation elevated for longer than markets previously anticipated.

For emerging economies, including Bangladesh, a prolonged period of higher European interest rates could influence global capital flows, borrowing costs, exchange-rate dynamics, and export demand.

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Dhaka, Bangladesh (BBN) - Global financial markets once again demonstrated their remarkable ability to separate geopolitical uncertainty from long-term growth narratives.

Despite escalating tensions in the Middle East and a sharp rise in oil prices, Wall Street pushed higher as investors remained focused on the transformative potential of artificial intelligence and technology-driven productivity gains, according to media reports.

📈 US Markets

• S&P 500 gained 0.26% to 7,599.96
• Nasdaq advanced 0.42%
• Dow Jones added 0.09%

The rally was largely powered by AI-related developments. Nvidia's unveiling of its RTX Spark PC chip reinforced investor confidence in the next phase of AI adoption beyond data centers and into personal computing. ServiceNow (+9.25%) and IBM (+7.52%) emerged as major beneficiaries of the AI optimism.

However, Nvidia’s expansion into the PC market also created clear winners and losers. Qualcomm (-8.78%) and Intel (-5.35%) came under pressure as investors reassessed competitive dynamics in the semiconductor industry.

Another notable milestone came from Micron, whose shares surged 6.56%, pushing its market value above the USD 1 trillion mark for the first time, highlighting the growing strategic importance of memory technologies in the AI era.

🛢️ Energy and Fixed Income
Brent crude jumped 4.2% to USD 94.98 per barrel after briefly exceeding USD 97 amid concerns that Iran could suspend ceasefire negotiations. Rising energy prices contributed to higher Treasury yields, with the US 10-year yield climbing to 4.47%.

🏢 Corporate Activity
M&A activity remained robust. Berkshire Hathaway’s USD 6.8 billion acquisition of Taylor Morrison signals that CEO Greg Abel is willing to deploy capital aggressively as he begins his post-Warren Buffett leadership era. Meanwhile, Barry Diller’s People Inc proposed acquiring the remaining stake in MGM Resorts, underscoring continued consolidation trends across industries.

🌏 Asia’s AI Ambition
In Asia, SoftBank became Japan’s most valuable listed company after announcing plans to invest up to EUR 75 billion in AI data centres in France. The scale of the investment highlights how the global AI race is increasingly becoming an infrastructure race, with capital flowing into computing power, energy capacity, and data centre ecosystems.

🔎 Key Takeaway
Markets are sending a clear message: while geopolitical risks can influence short-term sentiment and commodity prices, investors continue to prioritize structural growth themes. Artificial intelligence, digital infrastructure, and strategic capital deployment remain the dominant forces shaping global asset prices and corporate valuations.

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Key concerns highlighted by Fitch include:

* Heavy dependence on Middle East remittances and energy imports, exposing Bangladesh to geopolitical shocks

* Persistently weak governance, banking sector fragility, and slow reform progress

* Declining private-sector credit growth and rising non-performing loans, especially in state-owned banks

* Low revenue mobilisation and widening fiscal deficits

* Continued inflationary pressures alongside slowing economic growth

Despite moderate public debt and continued access to concessional external financing, Fitch warned that uncertainty over reforms and external shocks could further pressure foreign exchange reserves, the currency, and overall macroeconomic stability.

The outlook revision signals growing international concern over Bangladesh’s economic resilience at a time when investor confidence and external sector stability remain under strain.

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According to the US Bureau of Labor Statistics, CPI rose 0.6% in April after a 0.9% jump in March, with energy accounting for over 40% of the monthly increase. Petrol prices alone climbed 28.4% year-on-year, while food inflation also accelerated at its fastest pace in nearly four years, according to media reports.

The implications extend far beyond the US economy. Markets have largely ruled out Federal Reserve rate cuts for 2026, while expectations of another rate hike are gaining traction. This signals a prolonged high-interest-rate environment globally.

For emerging economies like Bangladesh, the impact could be significant:

• Higher global oil prices may intensify imported inflation and widen trade deficits.

• A stronger US dollar and elevated interest rates could increase external borrowing costs and put renewed pressure on foreign exchange reserves.

• Rising shipping and commodity costs may further raise domestic production and transportation expenses.

• Global demand uncertainty could also affect export-oriented economies, particularly the apparel sector.

The latest US inflation data suggest that geopolitical risks are once again becoming a central driver of the global economic outlook — complicating monetary policy, trade flows and growth prospects across both advanced and developing economies.

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US Treasury Secretary Scott Bessent told a Senate committee that several US allies in the Gulf and Asia have requested dollar liquidity support through currency swap line arrangements. These mechanisms are designed to stabilise dollar funding markets and prevent disorderly sell-offs of US assets.

A proposed swap line with the United Arab Emirates is expected to benefit both economies, he noted—echoing remarks by Donald Trump, who recently confirmed such an arrangement is under consideration, according to media reports.

Why this matters:

* Ensuring dollar liquidity has become critical amid rising global uncertainty.

* Energy disruptions—especially around the Strait of Hormuz—are intensifying financial stress.

* Temporary US sanctions relief on Russian and Iranian oil has helped ease supply pressures.

Bessent added that these measures have effectively released around 250 million barrels of oil into the market. Without them, benchmark prices could have surged to $150 per barrel.

Big picture:

Dollar swap lines are reasserting their role as a key crisis-management tool—much like during the 2008 financial crisis—offering not just liquidity support, but also a buffer against geopolitical shocks in an increasingly fragile global economy.

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“ADB will deliver rapid, flexible, and scalable assistance to help countries manage immediate pressures and strengthen long-term resilience,” ADB President Masato Kanda said in a statement.

The support will include fast-disbursing budget assistance and trade and supply-chain financing to secure imports of essential goods, including oil, he added.

The Manila-based lender said it has sufficient resources to safeguard existing and planned operations while expanding emergency support in line with DMC needs, including through its countercyclical lending buffer. The bank is closely monitoring global market developments, particularly energy price volatility, inflationary pressures, and external account risks across Asia and the Pacific.

ADB’s latest analysis shows that disruptions to key shipping routes have already raised transport costs and delivery times. Supply risks extend beyond energy to critical industrial inputs such as petrochemicals and fertilisers, posing potential challenges for agriculture and food production. Economies dependent on tourism and remittances are also facing heightened vulnerabilities, while tighter financial conditions are putting pressure on currencies and capital flows.

In response, ADB said it stands ready to provide timely financial and technical support to help countries manage risks, maintain macroeconomic stability, and protect vulnerable populations.

The support package has two main components. The first is fast-disbursing budget support for countries facing fiscal pressures, including the use of the bank’s Countercyclical Support Facility to help governments stabilise their economies and cushion the impact on livelihoods.

The second component is ADB’s Trade and Supply Chain Finance Program (TSCFP), which supports the private sector to ensure continued flow of critical imports, including energy and food. The bank has decided to reactivate support for oil imports under the programme on an exceptional and temporary basis, citing the sharp rise in oil prices and supply chain disruptions.

ADB said it has begun discussions with severely affected DMCs on possible immediate support and will continue working with governments, development partners and the private sector to ensure coordinated responses aimed at maintaining economic stability and protecting vulnerable groups.

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The anticipated drop in output reflects lower cotton prices, shifting planting intentions in major producing countries, and weaker demand — particularly from China. With production currently exceeding consumption in 2025/26, the projected decline next season is expected to bring global supply and demand closer to equilibrium.

China is set to retain its position as the world’s largest producer and consumer of cotton, although its usage is forecast to ease slightly as manmade fibres continue to gain market share.

India, Brazil and the United States will remain pivotal suppliers to the global market, while Bangladesh and Vietnam are expected to sustain strong import demand.

World cotton lint trade is forecast at 9.6 million tonnes in 2026/27. Brazil is projected to remain the leading exporter, followed by the United States.

Meanwhile, evolving trade policy developments — including new US tariff measures and updated trade agreements involving Bangladesh, India and the European Union — are adding fresh uncertainty to the global cotton outlook. The ultimate impact will depend on how these measures are implemented and how markets respond.

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Services trade is also expected to cool, with exports projected to rise 4.6% in 2025 and 4.4% in 2026, compared with 6.8% in 2024.

“Trade growth will likely slow in 2026 as the impact of the cooling global economy and new tariffs set in,” the WTO warned in its latest update of "Global Trade Outlook and Statistics".

Still, the trade body noted that AI-driven demand helped buoy global flows in 2025. Exports of semiconductors, servers, and telecommunications equipment surged 20% year-on-year in value terms in the first half of the year, accounting for nearly half of global merchandise trade expansion.

Overall, world merchandise trade volumes rose 4.9% year-on-year in the first half of 2025, while trade values in US dollar terms increased 6%, following a 2% rise in 2024.

The WTO projects global GDP growth at 2.7% in 2025 and 2.6% in 2026. While the 2025 outlook was revised upward from earlier estimates, the 2026 downgrade offsets much of the gain, with tariff impacts expected to weigh more heavily in the later year. An early inventory buildup of durable goods in 2025 is unlikely to be fully unwound in 2026, further dampening demand.

By region, Asia and Africa are expected to lead export growth in 2025, alongside modest gains in South and Central America, the Caribbean, and the Middle East. Europe will likely see slower growth, while North America and the Commonwealth of Independent States (CIS) are projected to post declining exports. Least-developed countries (LDCs) are forecast to record solid export gains but may face weakening momentum ahead.

On the import side, Africa and LDCs are set to register the fastest growth in 2025, while North America is expected to see a contraction. In 2026, only North America, Europe, and the CIS are forecast to improve their export performance, while imports are projected to weaken across all regions.

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Global stocks are expected to decline 3.8% to 15.37 million tonnes, led by a sharp drawdown in China, according to the International Cotton Advisory Committee (ICAC) latest report, released on Wednesday.

China’s 2024/25 ending stocks fell 9% to 7.89 million tonnes, a reduction that also drove a 65% plunge in imports to 1.1 million tonnes.

For 2025/26, China has maintained its quota policy, allowing 200,000 tonnes of sliding tariff rate cotton imports for textile enterprises.

Outside China, stocks increased by 2.0% in 2024/25, with the United States reporting the largest gain — ending the season with a 9.0% rise to 817,000 tonnes. Brazil and West Africa also posted higher stock levels during the same period.

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But what are government bonds? What determines how much investors will pay for them? And what can bond “yield curves” tell us about an economy?

Consider a government whose outlays exceed its revenues by $100. To finance the deficit, it can borrow from investors by issuing a bond. The bond is a promise by the government to pay back the $100 principal to investors at a future date, plus annual interest, called a coupon payment, to compensate investors for the opportunity cost of parking their funds in the bond rather than some other investment.

This opportunity cost has two components: an inflation component (to preserve the purchasing power of investors’ money) and a real, inflation-adjusted, component (the additional return, on top of inflation, investors might forgo on alternative investments). The higher the expected rate of inflation and returns on alternative investments, the higher the return the government must generally offer investors.

Suppose the government issues a one-year $100 bond, or bill, with a coupon rate of 5 percent. This is a commitment to pay back investors $105 after one year: $100 in principal, $5 in interest. If the coupon rate equals the investors’ opportunity cost, investors will be willing to buy the bond at its face value, or at par ($100, in this example).

But if investors’ opportunity cost exceeds the 5 percent coupon, they will buy the bond only at a price below par. Say they are willing to pay only $98. This would provide a higher return on their investment, specifically 7.1 percent [(105÷98)-1]. This total return, which by definition equals investors’ opportunity cost, represents the bond’s yield (or yield to maturity).

Primary and secondary markets

A direct bond sale by the government to investors is a primary market transaction. But bonds can also change hands between investors in the secondary market. This is because bonds are tradable securities, like stocks. The key implication is that the issuance yield on a bond can differ from the prevailing market yield.

For instance, let’s assume that a major commercial bank fails immediately after the government issues the $100 bond above. This fuels fears of a financial crisis and recession. As investors come to expect smaller returns and lower inflation because of the recession, the opportunity cost of funds falls sharply, from 7.1 percent to 3 percent. In this situation, the bond issued at $98 will now trade above par in the secondary market, at $101.95, to reflect the new market yield of 3 percent.

Governments can issue bonds of different maturities, typically ranging from 1 to 30 years. Each bond has its own coupon rate and associated yield to maturity. Longer-term bonds usually carry a higher yield. This is called term premium. It reflects the additional compensation investors demand for the uncertainty associated with future inflation and economic conditions, and for forgoing other investments for longer.

Chart 1 plots bonds’ maturities on the horizontal axis and their corresponding market yields at a given time on the vertical axis. These yield curves tell us many things—the most important is whether markets expect the economy to strengthen or weaken.

Let’s assume markets expect economic growth to accelerate. This means future inflation will likely be higher than present inflation: As the economy heats up, demand for goods and services will pick up and eventually feed into prices. The lure of alternative investments, such as commodities or property, will also rise as economic activity strengthens. Both these factors mean investors will demand a higher yield on a longer-term than on a shorter-term government bond. In other words, the yield curve will slope upward—as was the case for the US on December 16, 2024 (see red line).

Are yield curves always upward-sloping? No. When US inflation spiked following the COVID-19 pandemic, the Federal Reserve hiked interest rates. Because higher interest rates typically dampen household consumption and business investment, the hike fueled expectations of an economic slowdown, weaker inflation, and lower economic returns. Reflecting these market expectations, the government yield curve began to invert, or slope downward (see blue line). An inverted yield curve is often seen as a recession predictor, and, until recently, inversions preceded every US economic contraction for the past half century.

Country risk premium

Do yield curves of government bonds in emerging markets and low-income countries convey the same information as those of advanced economies? Yes, but with a greater focus on country risk premium. Major advanced economies are diversified, and their institutions are strong. Their sovereign bonds are generally considered safe because investors are almost certain the government will pay them back. The same cannot be said for all developing economies, which typically have weaker institutions and are more prone to shocks that can lead to large currency depreciations, rapid inflation, and loss of access to market funding.

Some developing economy governments—especially those with lots of foreign-currency debt—must sometimes restructure their debt (change their bonds’ repayment profile, yield, or both). This default risk, or country risk premium, means their bond yields are generally higher than those for advanced economies across all maturities. This difference in bond yields, or spread, is an important indicator of sovereign credit risk (see dark gray line).

When country risk reaches a point where markets see debt restructuring as imminent, the yield on bonds with short residual maturities typically spikes, producing a sharply inverted yield curve. In early 2014, for instance, nobody knew that Ukraine would restructure its sovereign bonds within a year. But the March 2014 inverted yield curve showed that investors were already pricing in a debt event. Because such operations involve a bigger extension of the residual maturity of bonds falling due sooner (in 2015, say) than those due later (2018), investors demanded a higher yield on the former than the latter (see yellow line).

Developing bond markets

Many developing economies are working to develop the market for local-currency government bonds to reduce reliance on foreign-currency borrowing, which carries exchange rate risk. Putting in place the requirements for such a market—sound debt management, robust laws, regulations and market infrastructure, and a diversified domestic investor base—can take time, but the rewards are substantial.

The IMF, together with the World Bank, provides active guidance to governments in this area. It’s encouraging that many developing economies, notably in Asia and Latin America, have made progress on this front in recent decades.

A yield curve in a well-functioning government bond market not only tells us something about the economy’s outlook, but is also a benchmark for pricing other financial assets, such as long-term bank loans, corporate bonds, and mortgages. It facilitates more efficient allocation of resources and thus supports long-term economic growth.

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