Last week saw the release of the minutes of the March 18th FOMC meeting. They underscored a clear “hold and assess” stance amid heightened uncertainty from the Iran conflict. While near-term inflation has risen on the back of a sharp energy shock, policymakers broadly judged longer-run expectations to remain anchored, allowing them to look through the initial price spike. The key message was that policy is now finely balanced: upside risks to inflation have increased, but so have downside risks to growth and employment. This is reflected in a growing willingness to consider both rate cuts and hikes, depending on incoming data. Recent remarks from Scott Bessent and Stephen Miran reinforce this patience, emphasizing limited pass-through to expectations so far, even if more cautious voices such as Austan Goolsbee highlight stagflation risks. Overall, the Fed appears set to remain on hold ahead of the next FOMC meeting (April 29th), with optionality elevated and timing of any easing pushed back until more visibility on the growth and inflation dynamics. Future markets are pricing stable Fed rates till September, before possibly a rate hike in the later months of the year (35% probability).

At the ECB, the narrative is shifting from a clear tightening bias toward greater uncertainty. While officials such as Dimitar Radev and Olaf Sleijpen acknowledge rising inflation risks from energy, others, including Olli Rehn, stress that rate hikes are “not self-evident.” Christine Lagarde captured the evolving stance, noting the euro area sits between baseline and adverse scenarios without a clear policy direction. Markets have scaled back somewhat expectations for aggressive tightening, reflecting this more cautious and data-dependent approach. A rate hike at the April 30th meeting is seen as unlikely (25% probability) and expectations for end-2026 ECB rates are now closer to two 25b hikes than the three expected earlier in April.

Credit

Credit markets had a rollercoaster week. Last Wednesday saw the biggest one-day decline in Brent oil price since 1991, following the 11^th hour ceasefire agreement. The 10-year German government yield recorded its largest daily decline in the past three years.

All credit segments rallied strongly on the day. However, part of these gains was subsequently reversed after Iran accused Israel of violating the ceasefire by striking Lebanon. Gains were further reversed on Monday following the failed ceasefire talks in Pakistan.

Despite this, credit spreads showed negative correlation with Treasury and Bund yield moves. Real money investors such as insurance companies might have stepped in and bought corporate credits. All-in yields of corporate credits are more attractive than the last energy crisis in 2022 during the early phase of Russia-Ukraine war.

Currently, parts of the credit spreads are trading tighter than the pre-US Iran conflict, such as US High Yield (HY), EUR Healthcare and EUR Energy.

While EUR investment grade (IG) and EUR HY continued to see outflows, the pace has moderated significantly. By contrast, in the weeks after the outbreak of Russia-Ukraine war, the outflows were more pronounced.

Government bond funds recorded another week of inflows, supported by elevated risk-free rates in academic concept.

Looking ahead, inflation is likely to move higher in the coming months as the energy price shock feeds through. In this environment, sectors with strong pricing power and the ability to pass on higher costs, such as capital goods and utilities, are likely be better positioned.