Uncertainty Rules!

By Elwin de Groot, head of macro strategy at Rabobank

US Treasury yields drifted higher yesterday after the Financial Times reported, citing people close to Fed Chair Kevin Warsh, that he would be prepared to raise rates as early as September if incoming inflation data surprise to the upside and markets themselves begin pricing a more hawkish path. Yet the market reaction was not confined to the front end suggesting investors were not interpreting the story in a straightforwardly hawkish manner.

That ambiguity is understandable. If markets push yields higher on expectations of tighter policy, the Fed may feel less need to deliver that tightening. Note also that Warsh himself was not speaking, and one of his recurring themes has been a dislike of explicit forward guidance. Moreover, September remains some distance away in market time, particularly in an environment where geopolitical developments can overturn macro narratives overnight.

Indeed, whilst oil prices had come down in the early part of this week on the back of renewed signs that the Strait of Hormuz could gradually reopen, those same prices rose again overnight as a convincing agreement remains elusive as it offers no permanent solutions for the key sticking points. Instead, it offers another 60-day window of free transits through Hormuz while further negotiations resume. Reports suggest Iran is looking to restrict US and Israeli ships from the Strait and it’s been ear-deafening silent on the ‘nuclear’ issue, for example. If a deal is agreed, it could be a matter of time until either party expresses frustration with the negotiations again and markets are forced to price in another few weeks of geopolitical tension.

Meanwhile, refined products are feeling the pinch of impending shortages, leading us to revise up sharply our forecasts for diesel, gasoil and marine fuels, as our senior energy analyst Joe DeLaura writes. In Europe, it is the winter-demand pressure that hangs over the market. The underpriced risk is that Europe’s own weather stress raises gas burn through the power sector just as LNG supply risks remain elevated, our senior energy analyst Florence Schmitt writes.

European macro data offered little inspiration yesterday. German factory orders surprised to the upside in June, though largely thanks to volatile big-ticket orders. This morning saw industrial production tick 0.2% m/m higher that month, but this was offset by lower growth in the previous month. Elsewhere, the picture was even less encouraging. Industrial production fell in both Spain and Italy, raising the possibility that the eurozone's preliminary 0.4% q/q GDP growth estimate may yet be revised lower. Eurozone retail sales also disappointed, falling 0.3% m/m in June and largely offsetting May's upwardly revised increase. The broader message is that growth concerns are unlikely to disappear simply because oil prices have eased from their recent highs.

In fact, what increasingly defines the global economy is not any single shock, but the relentless arrival of new ones. Businesses and households are being bombarded (in some regions rather literally) by an overlapping set of disruptions: trade disputes, geopolitical conflict, policy uncertainty, financial market volatility, technological disruption and natural disasters. The first eight months of 2026 have already provided a year's worth of such events.

The obvious example is the Middle East conflict and the disruption of shipping through Hormuz. But it is far from the only one. Investors continue to grapple with uncertainty surrounding the US tariff regime, while questions persist over the sustainability of the AI investment boom and the valuations attached to it. A rising string of hacking reports and AI models behaving unexpectedly has raised concerns over AI’s controllability.

In Europe, concerns are mounting over intensifying Chinese competition and the growing economic costs of climate change. Scorching temperatures, drying rivers and devastating wildfires have already become defining features of this summer. Looking ahead, forecasters are increasingly focused on the emergence of a potential "super El Niño" event, which could amplify weather-related disruptions across a wide range of emerging and developed economies.

Yet uncertainty is more than merely a transmission channel for shocks. It is an economic force in its own right.

Franklin D. Roosevelt famously captured this during the depths of the Great Depression when he declared in his first inaugural address that "the only thing we have to fear is fear itself". Nearly a century later, the insight remains remarkably relevant. Uncertainty can paralyze decision-making, delay investment, encourage precautionary saving and ultimately amplify the effects of whatever shock triggered it in the first place.

An interesting ECB study published in its latest Economic Bulletin broadly confirms the point. Looking at the eurozone, the analysis finds that uncertainty shocks tend to reduce investment, particularly spending on tangible capital, as well as consumer purchases of durable goods. The effects are most visible during the first two to four quarters following the shock. Importantly, however, the impact appears largely transitory. After an initial decline, activity tends to recover and the long-run effect on output is limited.

Part of that result may reflect modelling choices. But there is also an intuitive economic explanation: people learn. Households, businesses and investors gradually adapt to recurring shocks. The unfamiliar becomes familiar. What initially causes panic eventually becomes incorporated into decision-making. That observation brings us back to a theme from our Monthly Outlook, Groundhog Day Economics: markets seem to become more accustomed to geopolitical disruptions, yet every recurring script carries the risk of a very different ending.

Interestingly, the same logic may apply in reverse. As our colleague Stefan Koopman argues here, UK Prime Minister Andy Burnham may seek to replace "securonomics" with a form of "vibonomics": generating a series of positive confidence shocks before embarking on more politically difficult structural reforms. The idea is simple enough. If uncertainty depresses activity, improved confidence can temporarily support it.

The key word, however, is temporarily. The lesson from both the ECB's research and recent market experience is that confidence effects can move demand forward in time, but they do not permanently raise an economy's growth potential. Lower precautionary savings may provide a one-off boost to spending. Positive sentiment may temporarily lift GDP. But neither changes the underlying supply capacity of an economy.

Ultimately, uncertainty may rule the headlines, and confidence may shape the near-term cycle. But lasting prosperity still depends on a far less fashionable ingredient: stronger supply-side growth.