It has been another highly volatile week, with financial markets moving on headlines from the war in Iran and sharp swings in energy prices. Attacks on energy infrastructure in the Middle East have escalated the conflict and prolonged the negative supply shock facing the global economy. As a result, the two-year European swap rate has risen from 2.60% to 2.82%, as the TTF gas price surged to EUR 62/MWh from EUR 50/MWh last week and the oil price to USD 110 per barrel from USD 100. Equities have declined as the war drags on with increasingly negative effects on demand. We expect markets to continue reacting to headlines from the war in Iran and emphasise that the destruction of energy infrastructure lengthens the impact on the global economy even when the war ends.
Amid high volatility and the war in Iran, central banks around the world met this week. The US Federal Reserve kept the target range at 3.5-3.75%, as expected. Chair Powell offered little forward guidance and appeared more concerned about inflation than downside growth risks. The median ‘dots’ were unchanged, but the distribution shifted towards later cuts. Markets reacted slightly hawkishly and now price only 5bp of cuts this year, while we still expect two cuts in June and September. The ECB also left key policy rates unchanged, keeping the deposit facility rate at 2.00%, as expected. President Lagarde offered a calm, balanced assessment of higher energy prices, suggesting the ECB is in no hurry to raise rates. In a forecast scenario closely aligned with current commodity futures pricing, ECB staff project euro area HICP inflation at 3.5% y/y in 2026 and 2.1% y/y in 2027, with growth at 0.6% y/y in 2026 and 1.2% y/y in 2027. We believe this should serve as the current baseline for the euro area and allow the ECB to keep policy unchanged at 2.00% in both 2026 and 2027, though we acknowledge clear upside risks to this call. Markets are currently pricing in 75bp worth of hikes this year. In contrast to the ECB and the Fed, the Bank of England delivered a clear hawkish surprise as all members voted to keep rates at 3.75%, whereas two had been expected to maintain their call for cuts. The communication was also hawkish, highlighting risks of second-round inflation effects from higher energy prices, so markets now price three BoE hikes this year. In Japan, the Bank of Japan kept rates unchanged at 0.75%, as expected, and delivered no news that affected market pricing.
Beyond central bank meetings, this week also brought new macro releases. Germany’s ZEW survey for March showed an improved assessment of the current situation, while expectations for future growth saw a historically sharp decline. In the United States, February PPI surprised to the upside for a second month, with broad-based increases suggesting tariff-related cost pressures are building, a hawkish signal. In China, the monthly data were slightly better than expected, with retail sales rising and smaller declines in house prices.
Next week, attention turns to the March flash PMIs for the euro area, UK and US on Tuesday. We expect the euro area manufacturing PMI to decline to 49.3 from 50.8, while the services PMI is likely unchanged as higher energy prices have yet to feed through. Spain’s flash March inflation is due on Friday, while February inflation will be released for Japan on Tuesday and for the UK on Wednesday.
