Markets
With the policy meetings of major central banks having passed last week, markets today returned their focus to the conflict in the Middle East. The latest political development was labelled “Project Freedom”, with President Trump indicating that the U.S. would guide stranded ships in the Persian Gulf through the Strait of Hormuz.
Looking at oil prices, markets were not convinced this would help resolve the conflict. Brent crude at the European open moved back above $110/bbl. Skepticism proved justified as conflicting reports emerged regarding an incident involving a U.S. naval vessel entering the Strait of Hormuz. Later, U.S. Treasury Secretary Bessent reiterated that the U.S. is reopening Hormuz.
Whatever the underlying reality, oil prices do not yet signal any meaningful progress toward coordinated de-escalation. Central bankers, including the BoE and ECB, warned last week that a prolonged period of elevated oil prices and supply disruptions could force tighter policy.
U.S. and European yields reversed part of last Thursday’s decline, returning to a bear-flattening pattern alongside rising oil prices. U.S. yields gained between 3.5–4.5 bps, while German yields rose between 1.5–4 bps. A series of ECB speakers reiterated differing views along the hawkish-dovish spectrum.
Slovak ECB member Kazimir stood out, stating that “policy tightening in June was all but inevitable” as broad-based inflation risks increase. Others, including outgoing ECB member Villeroy, adopted a more balanced tone, though most acknowledged growing pass-through risks.
European equities struggled to follow tech-driven gains in parts of Asia and came under pressure as oil prices and yields moved higher (Eurostoxx 50 -0.85%). U.S. indices opened little changed.
On FX markets, the dollar is gaining on lingering geopolitical uncertainty and rising oil prices, though most moves remain technically limited. DXY trades near 98.40 (from 98.05), while EUR/USD holds near 1.17 despite some downside pressure.
The euro has so far shown limited damage from higher oil prices and renewed trade tensions, including President Trump’s threat to raise tariffs on EU autos to 25%.
Japanese markets remain closed for Golden Week, but markets are alert to potential yen-supportive intervention from the Ministry of Finance. Authorities reiterated their readiness to act against speculative moves. Despite a brief yen strengthening earlier, USD/JPY is little changed around 157.1.
News & Views
The Czech manufacturing PMI stabilized at 52.9 in April, beating expectations of 51.4. Output and new orders expanded despite significant supply chain disruptions. Firms increased input buying and stockpiling amid shortages linked to the Gulf conflict.
Supplier performance deteriorated sharply, marking the steepest decline in quality since mid-2022. Business confidence weakened, while cost pressures rose significantly.
Operating expenses surged at the fastest pace in nearly four years, with output prices accelerating to their strongest level since January 2023. Firms are increasingly absorbing costs through margin compression.
The ECB’s Survey of Professional Forecasters (Q2 2026) showed upward revisions to inflation expectations. Headline HICP is now seen at 2.7% for 2026 (from 1.8%) and 2.1% for 2027 (from 2%).
This aligns closely with the ECB’s March projections, which President Lagarde recently suggested are becoming outdated. Core inflation is now projected at 2.2% across the policy horizon, up from 2.0% previously.
Wage growth expectations also increased, averaging 3.3%, 3.1%, and 2.9% for 2026–2028. Long-term inflation expectations remain anchored at 2%.
Growth expectations were revised slightly lower, with GDP now seen at 1.0% for 2026 (from 1.2%), before stabilizing around 1.3% in 2027–2028.
