Muzinich Weekly Market Comment: Economic Reflation

September 14, 2026

If you have any feedback on this article or are interested in subscribing to our content, please contact us at opinions@muzinich.com or fill out the form on the right hand side of this page.

--------

It was a difficult week for investors. Only a portfolio of cash and oil - fully hedged into Japanese yen – would have come out ahead; an unlikely allocation, and barring it, few strategies managed to finish the week with a positive total return.

As is often the case in September, government bond yields were at the epicenter, and last week, they were rattled by an almost perfect storm of investor, economic, technical and fiscal fears hitting all at once. The global bond curve bear flattened for the second straight week, but this time with far more force, as investors grappled with geopolitical stalemates, central bank guidance, economic reflation, a supply avalanche and scant regard for fiscal discipline.

On the tariff front, no common ground was found between Washington and Ottawa. Canada's retaliatory measures, covering roughly 700 products at 15%, 25%, and 50% and about US$20 billion of US goods, are now in force, countering the 50% US duties on roughly US$20 billion of Canadian imports. On balance, the escalation is more bark than bite economically, primarily because of its narrow scope: around 85% of cross border trade still moves duty free under the United States-Mexico-Canada Agreement (USMCA). To put this in perspective, tariffs on Canadian goods have risen 8.3% since the current US administration took office, still leaving Canada with one of the lowest average rates of any US trading partner, while Canada's countermeasures have added 6.3%.^[1] That leaves plenty of room to escalate further, and the administration's threat to lift tariffs on Canadian autos and auto parts to 50% from January 1, 2027, did nothing to improve sentiment. ^[2] The cost may tell more in the midterms than in the economics, as US export exposure is concentrated in a handful of states, including Michigan, which has a genuinely competitive open Senate seat and exported US$23.2 billion to Canada in 2025, or 38% of its total exports. ^[3]

On the Middle East front, last week it seemed that ‘all news was bad news.’ Headlines flashed across screens, pointing to an alarming escalation: maritime attacks intensified, Saudi Arabia was forced to halt operations at multiple energy sites following attacks and explosions were reported near Kharg Island. ^[4] Meanwhile, the security of Red Sea shipping came into question, raising concerns over potential knock-on effects for Saudi oil exports, as Houthi rebels captured Yemen's port city of Mokha.^[5]

Stepping back from the headlines, what's now becoming clear is that a near-term solution is unlikely. A senior Iranian official said Iran was ready for a more intense war if the US continued its attacks, while Trump suggested he thought the war would only end after the midterm elections in November. At the same time, White House advisers had privately raised the prospect with Trump that the war could continue for the rest of his term. ^[6] Was this a tactical shift from the US administration after failing to deliver a quick resolution, a case of ‘kitchen sinking expectations’ so that any positive developments in the run-up to the midterms can be advertised as a moral victory?

On the central bank front, the European Central Bank (ECB) held its policy meeting, raising its three key rates by 25 basis points and bringing the deposit rate to 2.50%, in line with consensus. What came as more of a shock to investors was the shift in tone, which was markedly more hawkish. Staff projections showed upward revisions to inflation, with headline Harmonised Index of Consumer Prices (HICP) for 2027 revised up to 2.5% from 2.3% in June, and core HICP for 2027 up to 2.6% from 2.5%. The statement noted that "inflation is set to remain well above target for an extended period," the first time the ECB's outlook has flagged the persistence of above target inflation^[7].

President Christine Lagarde called the hike "a no brainer", decided unanimously, and said it was "robust" against all three scenarios the ECB mapped out for the region's economy. ^[8] The growth outlook was also more upbeat: 2026 GDP growth was revised up to 0.9%, reflecting stronger-than-expected Q2 2026 data and firmer domestic demand in the second half of the year. That stronger momentum into year-end also creates a more favorable carryover into 2027, lifting next year's growth forecast to 1.4% from 1.2%.^[9]

On the economic front, we had positive news on growth for the UK, with a surprise jump in July's GDP. The economy expanded 0.4% in the month, well above consensus forecasts for no growth at all. This follows a surprisingly strong 0.3% rise in June. Services was the chief driver of the monthly gain, rising 0.4%, while production expanded 0.2% and construction grew 0.1%. There were also tentative signs that AI related activity is providing a boost; computer programming, consultancy and related activities rose by 3.5% on the month, contributing 0.1 percentage point to the overall rise in GDP. ⁹

Meanwhile, US pricing indexes left economists with no doubt that pricing pressures are not fading. Producer price inflation showed renewed pressure from rising energy prices, up 0.4% in August and 5.4% year-over-year.^[10] On the consumer side, headline Consumer Price Index (CPI) accelerated 0.4% and core CPI 0.3% on the month, with signs that rising freight costs – driven by higher diesel prices and reduced trucking capacity – are passing through to consumer prices. Appliances rose a brisk 1.3% (vs. 0.8% prior), and core services accelerated to 0.3% (vs. 0.2% prior), led by lodging and airfares.^[11]

On the supply front, investors braced for another blockbuster week of issuance. The US Treasury said it will purchase up to US$6 billion of longer-dated government debt in the first operation under its expanded buyback programme, aiming to improve technical sentiment.^[12] But the size paled in significance next to the primary market. The Treasury printed US$39 billion of 10-year notes and US$22 billion of 30-year bonds. Corporates piled in too. On Tuesday alone, 18 companies were marketing bonds in the US, while in Europe, 20 issuers sought to raise roughly €27.7 billion.^[13] In the UK, Amazon raised £4.25 billion (US$5.8 billion) from its debut sterling bond sale.^[14]

Pulling the week's events together, and perhaps to the surprise of some investors, economists and central banks alike, the world has entered a reflationary phase of the economic cycle. That is, both growth and inflation are rising (see Chart of the Week). Growth is being supported by loose fiscal policy, AI investment, and full employment, while inflation is being stoked by supply shocks. For fixed income investors, reflation is typically good for corporate credit spreads, but bad for interest rates (see Chart of the Week).

This brings us to the reaction function of central banks, which are entering this phase of the cycle from an unusual starting point, near neutral rates. The question is whether they will now overreach and tighten policy at the expense of growth. Over the past month, there's been a significant increase in the amount of policy tightening now expected (see Chart of the Week).

Charts of the Week: A Reflationary Environment

Source: Bloomberg, as of September 11, 2026. Muzinich views and opinions are subject to change. For illustrative purposes only, not to be construed as investment advice or an invitation to engage in any investment activity.

Past performance is not a reliable indicator of current or future results.

References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account.

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of September 11, 2026, and may change without notice. All data figures are from Bloomberg, as of September 11, 2026, unless otherwise stated.

References

[1] Bloomberg, “GLOBAL INSIGHT: What’s at Stake for Canada in Trump Trade Spat,” September 8, 2026
[2] Bloomberg, “Carney Says Tariffs on US Meant to Protect Canada, Not Escalate,” September 8, 2026
[3] News Tribune, “Canada’s retaliatory tariffs poised to hit Michigan manufacturing,” September 1, 2026
[4] Bloomberg, “Oil Jumps on New Houthi Attacks, Reported Kharg Island Blasts,” September 8. 2026
[5] New York Times, “Houthis Seize Strategic Red Sea Port, a Major Victory for Iranian Ally,” September 10, 2026
[6] Bloomberg, “Iran and US Set for Extended War With Neither Side Ceding Ground,” September 10, 2026
[7] Bloomberg, “ECB REACT: Hawkish Tone, Forecast Changes Flag December Hike,” September 10, 2026
[8] Bloomberg, “Lagarde Calls ECB Hike ‘No Brainer’ as Markets Bet on More Ahead,” September 10, 2026
[9] Bloomberg, “UK REACT: Surprise GDP Resilience Adds to Inflation Risk,” September 11, 2026
[10] Bloomberg, “US Producer Prices Rise Most in Three Months on Energy Surge,” September 10, 2026
[11] Bloomberg, “Hot Core CPI Will Likely Force Fed’s Hand to Hike,” September 11, 2026
[12] Bloomberg, “US Treasury Triples Long-Date Debt Buyback to $6 Billion,” September 9, 2026
[13] Bloomberg, “Global Bond Rush Builds as Issuers Race to Avoid Headwinds,” September 8, 2026
[14] Bloomberg, “Amazon Raises £4.25 Billion in Debut Sterling Bond Sale, September 9, 2026

--------

Important information

Muzinich & Co., “Muzinich” and/or the “Firm” referenced herein is defined as Muzinich & Co. Inc. and its affiliates. This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability, heightened pricing volatility and reduced market liquidity. Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only. Any forward-looking information or statements expressed in the above may prove to be incorrect. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Muzinich gives no undertaking that it shall update any of the information, data and opinions contained in the above.

United States: This material is for Institutional Investor use only – not for retail distribution. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC.

United Arab Emirates (UAE): This information is provided for discussion and informational purposes only and does not constitute an offer or solicitation in the UAE. It is intended solely for Professional Investors and should not be relied upon by any other person. This material has not been reviewed or approved by the UAE Securities and Commodities Authority, the UAE Central Bank or any other relevant authority. Nothing contained herein constitutes investment, legal, tax or other professional advice. Recipients should make their own independent assessment where appropriate.

Abu Dhabi Global Market (ADGM): This information is provided for discussion and informational purposes only and does not constitute an offer or solicitation in the ADGM. It is intended solely for Professional Clients (as defined by the Financial Services Regulatory Authority) and should not be relied upon by any other person. This material has not been reviewed or approved by the Financial Services Regulatory Authority or any other relevant authority in the UAE.

Issued in the European Union by Muzinich & Co. (Ireland) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland, Company Registration No. 307511. Registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom.

2026-09-14-19401