The release of the US Employment report for May has only reinforced concerns around inflation risks repeated earlier in the week by several Fed members. Cleveland Fed President Beth Hammack argued that while keeping rates unchanged is appropriate for now given economic uncertainty, policymakers may soon need to respond if inflation remains persistently elevated. She stressed that inflation remains a greater concern than the still-resilient labor market and suggested policy may not currently be restrictive. New York Fed President John Williams similarly described policy as appropriately positioned, while noting no clear direction for future rates. Stronger-than-expected payroll growth reinforced this hawkish tone, prompting markets to fully price a 25bp rate hike by year-end and fueling expectations that the June FOMC meeting could signal a greater willingness to tighten if inflation pressures persist.

Attention is firmly on Thursday’s ECB meeting, where a 25bp rate increase is widely expected, especially in the context of the acceleration in euro-area inflation to 3.2% in May. Policymakers remain concerned that higher energy prices linked to the Middle East conflict could generate broader second-round effects through wages and corporate pricing. While the June move appears largely settled, officials continue to signal caution regarding the policy path beyond next week amid a weakening growth backdrop. Beyond the June 11^th decisions, future rate markets continue to fully price another 25bp rate hike at the September meeting, and the probability of a third rate hike by the end of 2026 bounced up to 67% last week after having declined in the 2^nd half of May.

BoE: Bank of England officials continued to express a cautious stance last week, that is expected to lead to a status quo on rates at the June 18^th meeting. MPC members Swati Dhingra and Alan Taylor both indicated rates are sufficiently restrictive for now, though neither ruled out further tightening should energy-driven inflation risks intensify. Future markets continue to price a 25bp rate hike later in the year, and the probability of another one rose back last week to 85%.

Credit

Credit spreads were generally resilient despite global rate selloffs, with spreads tightening across Euro Investment Grade (IG) and High Yield (HY). However, total returns were negative across most credit segments, driven by higher U.S. Treasury and German Bund yields. he only segment to generate positive returns was Banks AT1, supported by historically strong European bank fundamentals. Although US banks saw capital ratios decline modestly in 1Q due to shareholder distributions, capital levels remain comfortably above regulatory requirements.

Fund technicals continued to provide strong support. EUR IG funds attracted another week of sizeable inflows, with the asset class now offering a yield of 3.6% in a higher-rate environment. Pension funds and insurers increasingly find public credit attractive relative to private credit. EUR HY funds recorded their eighth consecutive weekly inflow.

Fundamentals remain constructive. US corporate profit margin expectations continue to rise, reflecting productivity gains from AI adoption. US hyperscalers remain structurally less leveraged than the broader IG universe, with average gross leverage of 1.8 times versus 3.3 times for the rest of the market.

Looking ahead, markets are fully pricing a 25-basis point ECB rate hike this Thursday, that would be the first in almost three years. Historically, initial hiking cycles have rarely disrupted corporate credit performance. With the ECB real policy rate after the pending rate hike at around negative 1%, financing conditions remain favourable: companies can invest and refinance debt.

Meanwhile, primary issuance has exceeded last year's pace, but supply should begin to slow as the summer lull approaches. Together with strong fund inflows and the prospect of negative net supply, technicals should remain favourable, potentially keeping credit spreads rangebound.