Must Read Research: Weather & Commodity Risks; Fed Hikes; EU Trade Dynamics and Evolving Consumers

Hello and welcome to Must Read Research on B of A Global Research Unlocked. In this podcast, we offer quick summaries from the prior week's most interesting and impactful research. I'm Candace Browning, Head of Global Research at B of A Securities, and we're recording this episode on Monday, May 18, 2026.

This week, we track how weather disruptions from El Nino may ripple through commodity markets that are already on edge, how sticky inflation and strong labor data could prompt unexpected Fed rate hikes, and how consumers are turning to Chinese autos, secondhand, and off-price retail as they contend with these higher prices. Let's start with weather and the outsized role it could play in global commodities. An exceptionally strong El Nino is forecasted this summer and autumn, risking major disruptions across global grain and sugar markets.

Wheat production in Australia and Argentina appears particularly exposed, with historical data showing consistent declines during El Nino years. Australian wheat output could fall 20 to 60 percent year over year in a severe drought. Sugar markets also face pressure as adverse weather threatens production in Brazil, India, and Thailand.

In 2015 to 2016, Brazil lost more than 50 crushing days to heavy rainfall, driving sucrose content to decade lows, while combined sugar output in India and Thailand fell 7 to 26 percent year over year. We think corn offers the biggest upside. El Nino arrives as the 2026 to 2027 U.S. corn balance sheet is already tight amid global fertilizer disruptions tied to the Hormuz closure.

That setup could rise U.S. export demand and push the USDA stock-to-use ratio from 13 percent toward our 8.7 percent forecast, which would approach the 2020 to 2021 decade low and potentially lift corn prices above six dollars a bushel. So from weather-driven supply shocks, let's turn to policy risk, specifically what markets may be missing from the Fed. At just five basis points of implied tightening, Co-Head of Global Rate Strategy Mark Cabana argues that the U.S. rates market is underestimating the risk of Fed rate hikes, despite what has been strong labor data, sticky inflation, and our Bank of America aggregated credit and debit card data reaffirming a resilient consumer backdrop.

April jobs remained firm and private payroll growth has averaged 86,000 this year, the strongest four-month pace since December 2024. Core PCE accelerated to 3.2 percent year-over-year in March, and much of the oil shock pass-through is still ahead. The last time payrolls were at similar levels, the Fed target stood at 4.5 percent, which is approximately 75 basis points above today's rate.

Policy rules point in the same direction. Even assuming tariff and commodity pressures moderate, the Taylor rule implies a target rate closer to 4 percent by the end of 2026. Our scenario analysis suggests markets may ultimately need to price at least 50 to 150 basis points of hikes.

From rates and macro, let's broaden out globally, starting with trade dynamics and autos. China's trade surplus with the EU exceeded $300 billion for the first time in the first quarter of 2026, surpassing that with the U.S. Europe's import surge appears driven less by U.S. tariff diversion and more by structural imbalances.

Among the 20 sectors where Chinese exports to the U.S. fell most year-over-year after April 2025, only eight also rank among Europe's largest import increases. Much of the growth reflects China's cost advantages, industrial subsidies, and the need to move excess capacity, trends that predate recent tariff actions. Head of European Automotive Research Horst Schneider addresses the surge in Chinese auto exports to Europe, and here, too, the dynamic goes beyond tariff diversion.

Chinese Original Equipment Manufacturer, or OEM, share in Europe has doubled to 8%, with first quarter sales up 100% year-over-year, and that is supported by higher fuel prices following the Iran conflict. Battery electric vehicles continue to gain share, and energy costs represent 12% of total ownership versus 26% for internal combustion engine vehicles. Local production is also accelerating, with 30% of Chinese OEM European volumes expected to be produced locally by 2030.

Finally, let's bring it back to the consumer, where spending behavior continues to evolve. Retailing department stores and specialty soft lines analyst Lorraine Hutchinson is often asked whether the rise in secondhand apparel poses a threat to discount retailers. To assess this risk, we constructed a data series from our Bank of America aggregated credit and debit card data and focused on online secondhand apparel vendors.

Our analysis shows that discount spending has outperformed secondhand in 8 of the 12 past months, driven by price increases and a mixed shift towards higher quality merchandise. Interest in secondhand remains strong, with transactions steadily increasing since 2024. However, spend per transaction has been declining since 2022, likely reflecting greater supply from sellers and more competitive pricing.

While secondhand spending has accelerated so far in 2026, April's 38% increase in transactions more than offset lower spend per transaction, resulting in 8% total spend growth. Across income terciles, transaction volumes are rising, with the higher income cohort accounting for the largest share of pre-owned apparel spend. So, from weather-driven commodity risks, to Fed policy uncertainty, to shifting trade flows and evolving consumer behavior, those are the themes shaping the conversation this week.

Thanks for listening. We'll be back next week. Bank of America N.A., member FDIC.

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