Markets
To meet or not to meet? That was the question last Friday. Conflicting messages appeared every hour, but in the end the US didn’t send its top negotiators on the 18h flight to Islamabad. Axios reports this morning that Iran has given a new proposal to the US. Addressing the US’s nuclear concerns would be postponed to a later stage, with the early focus on reopening Hormuz and ending the war. US President Trump is expected to hold a situation room meeting on Iran later today, discussing the current stalemate and potential options for the next steps in the war. Markets learned the hard way frontrunning an end to the conflict including sea traffic through Hormuz. Friday and this morning, there’s no relief rally in the likes of the oil price. Brent crude (June contract) trades at $107/b. Oil prices above $100 over the past two months tended to weigh on risk sentiment, cause bear flattening of core yield curves and support the dollar.
To hike or not to hike? That’s the question this week. Big central banks meet for a second time since the start of the fighting in the Middle East. At the March meeting, the likes of the ECB and BoE signaled a different reaction function compared with the energy supply shock of four years ago. The >2% inflation starting point poses greater risks of de-anchoring valuable inflation expectations. Earlier this month, the used public appearances to further exploit on possible reaction functions. Especially BoE governor Bailey pushed back against aggressive BoE rate hike bets. More in general, they used the initial two-week cease-fire and temporary decrease in oil prices to buy time. They’re looking for evidence in the data of inflation having a broader price impact (beyond energy). Last week’s April PMI’s offered a first clue with details showing a larger upward price effect than a downward growth effect. Especially input, but also output prices picked up tremendous pace. ECB President Lagarde said at the central bank’s end of March Watchers Conference that the optimal policy response to “a large though not-too-persistent overshoot of the inflation target” is some measured adjustment of policy. That’s the way markets have approached this from the very start of the conflict. The timing of a first hike has been variable, varying from April to June while the amount of rate hikes this year has swung between two and four. Going into this week’s meetings, June and 2-3 are on the scorecard for both the ECB and the BoE. The situation is slightly different for the Bank of Japan and the Fed. The BoJ was already looking in the direction of a new rate hike ahead of the war, but used downside economic risks as a reason to delay pulling the trigger. No action is expected tomorrow, but new quarterly forecasts could be the backbone of a move to 1% in June as well. Energy dependence sheltered the US from the oil shock. Fed Chair Powell will hold a steady course as the curtain falls on his tenure as Chair. If any (40% probability by year-end), US money markets err on the side of a cut as the next move as the central bank transitions to leadership under Kevin Warsh.
News & Views
Rating agency S&P has lowered Belgium’s rating from AA to AA- with a stable outlook. Moody’s last week cut Belgium into single A-category, voicing the same concerns as S&P did. The downgrade reflects persistent imbalances in public finances with budgetary consolidation to large structural budget deficits only being gradual, politically sensitive and subject to execution risks. The 2025 budget measures were insufficient to offset rising spending on age-related items and defense and interest payments, it said. The deficit has widened to about 5.2% in 2025 from 4.4% in 2024. S&P expects government measures taken in 2026 will only contain, not reduce the deficit for this year (5.2%). Shortfalls could still amount to 4.5% by 2029. Debt would therefore reach 109% by 2029 from 103% in 2025 with interest payments rising to 2.8% from 2.4%. Economic growth is seen slowing down to 0.9% this year from 1% but risks from prolonged trade disruptions and sustained higher energy prices loom. Inflation may decelerate to 2.4% from 3% in 2025.
Poland is pushing for new European tools to finance defense spending as its own budget is ballooning to unsustainable levels. Polish deficits soared to 7.3% of GDP last year. The country’s finance minister Domanski said defense spending is and will remain Poland’s top priority but the sheer amount of some 5% of GDP is weighing on public finances. Poland is making extensive use of the EU’s €150bn SAFE programme, which Domanski said is a “step in the right direction” but simultaneously calling for additional instruments because it falls short of actual needs. In a related note, Polish prime minister Tusk last week said that Brussels is contemplating to change the accounting rules so that spending via the SAFE initiative does not impact reported deficits.
