Central bank pricing turned marginally more dovish last week, with markets scaling back expectations for near-term tightening. The probability of a December rate hike by the Federal Reserve declined to 24% (from 29%), while expectations for an April hike by the ECB dropped notably from 80% to 52%.

In the US, the Fed is still expected to hold rates steady in April, although upside risks to further tightening are building. Policymakers delivered mixed signals: some emphasized persistent inflation risks, while others highlighted the importance of labor market conditions and policy flexibility. Although longer-term inflation expectations remain well anchored, elevated energy prices and geopolitical uncertainty continue to pose upside risks.

Similarly, ECB communication remained cautious and data-dependent. While officials acknowledged that tightening remains a “live option” (Nagel), there is a clear preference to wait for more clarity on the magnitude and persistence of the energy shock (Lagarde, Schnabel). For now, no policy change is expected in April, though the likelihood of a pre-emptive hike increases should fiscal responses amplify inflationary pressures.

The Swiss National Bank reiterated its readiness to intervene in FX markets to counter excessive franc strength. In the UK, Bank of England officials (Breeden, Taylor and Greene) downplayed the risk of second-round inflation effects, signaling a higher bar for intervention despite market expectations for further hikes.

The South Africa Reserve Bank kept its key rate unchanged last week to 6.75% as expected and raised its CPI inflation forecast for 2026 to 3.7% (from 3.3%). Mexico’s central bank cut its Overnight Rate by 25bp to 6.75%, extending the rate cut cycle initiated in 2024. 

Credit

Credit spreads widened as sentiment fluctuated amid the highly fluid situation in the Middle East: U.S. Investment Grade spreads widened by +5bp, U.S. High Yield by +21bp, while EUR Investment Grade spreads experienced a +10bp widening last week (+16bp for EUR High Yield). In terms of sectors within the EUR Investment Grade space, healthcare, telecom and energy outperformed, while real estate lagged.

A de-escalation scenario, combined with a relatively shallow ECB hiking cycle, could support European real estate. The sector enters this phase with improved balance sheets and lower leverage following two years of adjustment.

In financials, Barclays is reportedly scaling back asset-based lending following losses linked to Tricolor and Market Financial Solutions. These exposures relate to broadly syndicated loans rather than private credit. Barclays and Deutsche Bank, both hold around 5.5% exposure to private credit, highest among European banks but manageable. Meanwhile, Ares Capital imposed a 5% redemption gate after 11.6% quarterly outflows to protect net asset value. Fitch recently reiterated that Ares Capital’s liquidity will be sufficient to absorb several quarters of redemptions.

Redemption-driven headlines may continue to weigh on the listed private credit firms’ equity valuations. So far, the earnings of their underlying business remain resilient. Rating agencies also take comfort in their strong asset coverage and relatively low financial leverage of the top-tier private credit platforms.

Only four weeks into the conflict, it remains premature to assess the full impact of the energy shock. Input costs are rising, and if firms cannot pass these on, margin compression will become a key risk. As seen in 2022, energy-intensive sectors such as industrials and capital goods are most exposed. Governments have already responded with fuel duty cuts, price caps and targeted support measures. Domestic pressure is mounting on President Trump to de-escalate, as the conflict fuels an affordability squeeze—elevated gasoline and diesel prices, alongside 30-year mortgage rates reaching 6.4%.