The Federal Reserve held rates at 3.50%–3.75% but delivered a notably divided message, with four dissenters—the most since 1992. While one governor, S. Miran, favored a rate cut, three regional presidents pushed back against retaining an easing bias, signaling a subtle hawkish shift. Inflation was described as “elevated,” reflecting energy-driven pressures, with both headline and core PCE rising. Despite solid consumer demand, policymakers emphasized uncertainty around the outlook. Leadership developments also drew attention, with Kevin Warsh set to replace Jerome Powell, who may remain influential as a board governor. The Fed appears set to maintain a “wait-and-see” stance for the time being, and future markets have now fully priced out any potential rate cut for this year. Meanwhile, probabilities of a rate hike in 2027 are slowly rising…

The European Central Bank kept its deposit rate at 2.0% and signaled a clear hawkish pivot. Rate hikes were actively discussed, and President Christine Lagarde hinted that tightening may soon be necessary unless inflation risks subside. Energy-driven price pressures have lifted inflation expectations, even as growth indicators weaken. A de-escalation in the Middle east and lower energy prices could ease pressure for monetary policy tightening, but future markets currently assign an 80% probability to a June rate hike and still expect 2 to 3 rate hikes by the end of 2026.

The Bank of England held rates at 3.75% in an 8–1 vote, describing the decision as an “active hold.” Governor Andrew Bailey stressed that hikes were seriously considered, reflecting elevated uncertainty. The UK economy remains vulnerable to energy shocks and tightening financial conditions, though limited fiscal support may cushion households. While a June hold remains the base case, rising inflation risks are increasing the likelihood of rate hikes in the second half of the year (two 25bp hikes are currently fully priced in by future markets).

The Bank of Japan maintained its policy rate at 0.75% amid a split 6–3 vote, highlighting growing internal debate. Governor Kazuo Ueda adopted a cautiously hawkish tone, emphasizing vigilance toward inflation despite weaker growth prospects. Government stimulus and energy subsidies are expected to support the economy, and a rate hike during the summer remains likely.

Credit

Weekly total returns were flat for EUR credits, but slightly negative for USD credits because of higher U.S. Treasury yield. Stalled progress toward a Middle East resolution kept oil prices elevated, with Brent crude briefly moving above $120 per barrel intraday for the first time since 2022. Sovereign bond yields also reached multi-year highs in many countries last week before retreating this week.

Corporate credit spreads held in with notable resilience, remaining broadly unchanged or tightening despite the higher-rate backdrop and heavy primary supply. U.S. investment grade saw a near-record $184 billion of April issuance, supported by strong demand from retail investors and yield buyers. U.S. high yield delivered the strongest spread tightening, producing its best monthly gains in nearly a year.

In simple terms, perceived corporate credit risk remains contained, while all-in yields are more attractive due to higher Treasury and Bund yields.

For European credit, BofA notes that even two 25 basis point ECB rate hikes would still leave corporate bonds offering a meaningful yield advantage over bank deposits, at around 1.7 percentage points. Moreover, further ECB tightening could eventually create room for rate cuts in 2027–28, as the Eurozone economy may struggle to absorb tighter financial conditions for an extended period.

European bank earnings also remained supportive. Sixteen banks reported Q1 results, with most delivering robust performance and maintaining last year’s positive trends: decent profitability, strong capital and stable asset quality. One notable theme was management’s use of post-model adjustments to reflect geopolitical uncertainty and weaker macroeconomic forecasts. Without these overlays, loan impairment charges would have been lower.