Pressure on the Federal Reserve has moderated after President Trump’s Easter criticism was followed by a more conciliatory tone. Treasury Secretary Bessent’s remarks and soft but non-recessionary data helped markets regain composure. With tariffs’ full impact still unfolding, the Fed is expected to stay on hold at its May 7 meeting. Futures imply a 65% chance of a June cut and total easing of 87bps by year-end. Central bank independence was a key theme at the IMF Spring Meetings, with officials defending autonomy against political pressure. Christine Lagarde added that tariffs are likely more disinflationary than inflationary—bolstering the ECB’s case for further cuts. Indeed, the ECB is on track for another 25bp cut in June, with more likely before German fiscal stimulus kicks in next year. The euro’s 10% appreciation versus both the USD and yuan in 2025 intensifies deflationary risks. There’s growing concern that a surge of Chinese exports, diverted from the U.S. to Europe, could further weaken prices and industrial activity. In Switzerland, the strong franc is adding downward pressure on inflation. The SNB is now expected to cut its key rate to 0.00% in June and may even revisit negative territory in H2. The BoE is also preparing to ease, with a 25bp cut widely expected next week, followed by further cuts later this year. While rate cuts are broadening globally, the Fed’s caution stands out, underscoring the growing divergence in policy direction amid shared macro uncertainty.

Credit markets extended gains last week, though fund flows suggest investors remain wary. U.S. corporates continue to benefit from strong Q1 earnings, especially in financials, and corporates are managing balance sheets conservatively amid tariff uncertainty. Inflows returned to Euro IG, but U.S. IG, U.S. HY, and Euro HY all posted outflows. U.S. IG spreads narrowed 7bps to 104bps, pushing the Vanguard USD Corporate Bond ETF up 0.5% on the week and +1.6% YTD. Euro IG mirrored this move, tightening 6bps to 111bps, with the iShares Euro IG ETF adding +0.1% (YTD +0.9%). U.S. HY spreads tightened 35bps to 367bps, with the iShares USD HY ETF up 1.4% (YTD +0.2%). Euro HY followed closely, compressing 33bps to 354bps; iShares Euro HY ETF rose +1.1% (YTD +1.4%). High-beta instruments also rallied: European corporate hybrids gained +0.6% (YTD +1.0%), and the WisdomTree AT1 CoCo ETF added +1.2%, flipping positive on the year. Still, volatility remains high—spreads are swinging weekly, reminiscent of March 2023 post-SVB. With a 90-day pause on tariff escalation set to end in July, investors are rotating toward sectors less exposed to global trade. Spreads may continue to grind tighter, but direction remains data-dependent.