2026 Weekly Update

Market update

The S&P 500 closed the week at 6,506.48, -1.90% lower. The Dow Jones closed at 45,577.47, -2.11%, with the Nasdaq lower by -2.07%. The volatility index VIX closed the week at 26.78, down from 27.19. The Euro Stoxx 600 fell -3.79%.

The 10-year UST closed at 4.38%, up from 4.28% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 67 bps. US Corporate Bond spreads: Investment Grade spreads widened +2bps at 93bps and High Yield spreads widened +13bps at 369bps. German 10-year Bunds yield closed at +3.04% up from +2.98% a week before. In Europe, Corporate Investment Grade spreads widened +3bps at 102bps and High Yield widened +7bps at 352bps.

The US Dollar Index (DXY) depreciated -0.71% last week and closed at 99.65. The Euro closed at 1.1572 (+1.36%); the Yen appreciated +0.31%, closing at 159.23 and the Swiss Franc appreciated +0.39%, closing at 0.788. Gold closed at $4,492.42, depreciating -10.50%. Oil was mixed, Brent closed at $112.19 (+8.77%) and WTI at $98.32 (-0.40%).

Macroeconomy

Federal Reserve

The FOMC kept rates on hold at 3.50-3.75%, with Governor Miran the dissent in favor of a rate cut. The median Summary of Economic Projections dot continued to pencil in one rate cut this year, though some of the more dovish members trimmed their expectations for rate cuts. Hawkish nuances were then more evident in Powell’s press conference. While the Chair unsurprisingly said that the uncertainty stemming from the events in the Middle East creates risks to both sides of the Fed’s dual mandate, it is the inflation outlook that drew more of his attention. Powell argued that the Fed needs to see “progress on inflation” to cut rates again later this year, noting that core goods disinflation was “really important” in this respect. Powell also removed a line on core services disinflation from his prepared remarks. All this left a sense of increased concern about the continued overshoot of the inflation target, though he did say that a “vast majority” of the FOMC did not anticipate rate hikes. Away from policy, Powell said that he plans to stay on the Fed board until the current DoJ investigation into him is “well and truly over”, also adding that he had not yet decided whether he would otherwise continue to serve his term as Governor which ends in January 2028. So while Powell’s term as Fed Chair is due to end in May, this leaves open the prospect of him remaining as chair pro-tempore beyond this if President Trump’s nominee Kevin Warsh isn’t confirmed by the Senate by then. Note that Senator Tom Tillis has said he won’t advance Warsh’s nomination until the investigation into Powell is resolved.

European Central Bank

The European Central Bank (ECB) left the policy rate on hold at 2%, as expected, with President Lagarde noting that the decision was unanimous. Lagarde emphasized that the Governing Council (GC) was calm, determined, and “well-positioned” to deal with the unfolding shock. ECB staff projections exceptionally used a later cut-off date than usual (11 March). Headline inflation for 2026 was revised up to 2.6%, and gross domestic product (GDP) growth was revised down by 30 basis points to 0.9%. Importantly, medium-term inflation (2028) was revised up by 10 basis points to 2.1%, consistent with only modest second-round effects for now. Lagarde gave three triggers for a potential decision to increase policy rates: (1) the intensity of the supply shock caused by the conflict in Iran; (2) its duration; and (3) the propagation of the shock through the economy in the form of “second round” effects. Lagarde warned that, unlike in 2022, memories of inflation are fresher in people’s minds, which implies that inflation expectations are considered more fragile and more likely to respond to a rise in spot inflation. Overall, based on Lagarde’s comments, investors cannot rule out a “pre-emptive” rate hike at any of the next meetings.

Bank of England

The Bank of England (BoE) unanimously voted to keep the policy rate on hold at 3.75%. The change in guidance was notably more hawkish than expected, signaling a break from its previously dovish bias. Governor Bailey stated, “Whatever happens, our job is to make sure inflation gets back to the 2% target,” adding that “a larger or more protracted shock would require a more restrictive monetary policy.” However, during the press conference, Bailey also warned against reaching “a strong conclusion about rate hikes”. The BoE’s unexpectedly hawkish communication triggered a sharp market reaction, even though the Committee’s underlying message suggested a preference to hold and wait for more information on the Middle East shock.

Bank of Japan

The Bank of Japan kept policy rate unchanged at 0.75%, as widely expected. Market focus was on Governor Ueda’s presser. The governor reiterated two-way risk for underlying inflation from oil shocks and emphasized importance of assessing balance of risks through data coming in for next hike. He suggested material uncertainty and no high conviction on which direction risk is skewed at this point. Whether the BoJ will hike in April depends on their assessment/perception in balance of risks in underlying inflation which has been approaching 2% but has not taken hold yet as governor reiterated.

Swiss National Bank

The Swiss National Bank (SNB) continued to hold its policy rate at 0.0%, as widely expected. The threshold for negative rates remains high, although Schlegel acknowledged that “the likelihood for negative rates has increased”. Importantly, regarding foreign exchange, the SNB strengthened its language, mentioning an “increased” willingness to be active in the foreign exchange (FX) market to counter rapid and excessive appreciation of the Swiss franc. Inflation forecasts were slightly revised. The forecast for 2026 was raised to 0.5% from 0.3% due to higher energy prices, while forecasts for 2027 and 2028 were lowered due to the stronger Swiss franc, with the endpoint now at 0.7% instead of 0.8%. The SNB continues to expect growth of around 1% for 2026. We continue to expect the SNB to remain on hold this year.

Royal Bank of Australia

The Royal Bank of Australia (RBA) raised their cash rate target by 25bps, moving it from 3.85% to 4.1%. This decision, reached by a narrow 5-4 vote, reverses the two rate cuts implemented last year, returning the cash rate to its February 2025 level. The decision is a response to Australia's inflation persistently exceeding the RBA's 3% upper target. Meanwhile, the central bank highlighted that the ongoing conflict in the Middle East poses a significant risk for further price increases, noting that while the situation remains uncertain, it is expected to exacerbate both global and domestic inflationary pressures. The RBA further stated that inflation is projected to stay above its target for an extended period, with risks now leaning more towards the upside, thus justifying the rate increase.

Other central banks

Swedish Riksbank left its policy rate at 1.75%, with the governor saying that it is expected to remain at this level for some time, though alternative scenarios showed a wide range of uncertainty on the rate path ahead. China’s central bank kept its loan prime rates unchanged for a tenth straight month, with the one-year LPR held at 3.00% and the five-year rate, which influences mortgage pricing, at 3.50%, in line with market expectations.

Global data

In the US, February PPI came in above expectations. It showed monthly headline PPI at +0.7% (vs. +0.3% expected), which pushed the y-o-y reading up to +3.4% (vs. +3.0% expected). February industrial production was +0.2% (vs. +0.1% expected). In Canada, CPI print surprised on the downside, with headline inflation falling to +1.8% in February (vs. +1.9% expected). In Japan, February exports grew at a slower pace, as tariffs weighed on car shipments to the US and as demand in China slumped due to the Lunar New Year holidays. The value of overall exports rose +4.2% in February from a year earlier, after a big jump of +16.8% in the previous month, albeit beating market expectations of a +1.9% rise. Meanwhile, imports rebounded +10.2%, a little below the consensus estimate of +11.3%, as the trade balance swung to a surplus of ¥57.3 billion against an anticipated deficit of -¥460.0 billion. In China, activity data for February was stronger than expected. For instance, industrial production is up +6.3% on a y-o-y basis over the first two months of the year (vs. +5.3% expected), and retail sales also beat expectations at +2.8% (vs. +2.5% expected).

Highlights

Oil

Fears of a protracted conflict in the Middle East led to another rise in oil prices and mounting concerns about a stagflationary shock. Indeed, Brent crude oil was up another +8.77% to a new post-2022 high of $112.19/bbl. Significantly, the 6-month Brent future was also up +4.10% to $89.17/bbl. Investors are pricing in an extended period of high energy prices, as well as the inflationary consequences from that. However, WTI edged -0.40% lower to $98.32/bbl (+2.27% Friday), decoupling from global markets. That came as Treasury Secretary Bessent suggested there could be another release from the Strategic Petroleum Reserve and weighed removing some sanctions on Iranian oil.

On rates

That prospect of higher inflation led markets to price in a growing probability of rate hikes, particularly after the latest decisions from the Fed, ECB, BoE and the BoJ. All four left rates unchanged, but several hawkish elements contributed to a major selloff for government bonds around the world. For instance, a Bloomberg article after the ECB decision suggested that officials saw a possibility of a rate hike at the next meeting in April, and Bundesbank President Nagel suggested that more restrictive policy could be necessary if the inflation outlook worsened and inflation expectations saw a sustained rise. By Friday, investors were pricing in 77bps of ECB hikes this year, up from 47bps at the start of the week. Meanwhile for the Bank of England, markets moved to price 84bps of hikes, having priced cuts less than two weeks ago. Otherwise, the Fed still penciled in another 2026 rate cut in their dot plot, but they also upgraded their inflation forecasts and by the end of the week, fed funds futures completely priced out 2026 cuts. All this drove some huge moves in government bond yields. In fact, the 10yr German bund rose +6.1bps last week to close above 3% for the first time since 2011, at 3.04%. Then in the UK, the 10yr gilt yield was up +17.1bps to 4.99%, marking its highest level since 2008. 2yr Gilts climbed +46bps last week. And in the US, the 10yr Treasury yield was up +10.4bps to 4.38%, its highest level since last July.

What to watch

• Monday: US February Chicago Fed national activity index, January construction spending; Japan first survey of shunto results; Eurozone March consumer confidence
• Tuesday: US, UK, Japan, Germany, France, Eurozone flash March PMIs; US March Philadelphia Fed non-manufacturing activity, Richmond Fed manufacturing index, business conditions; Japan February national CPI; EU27 February new car registrations
• Wednesday: US February import price index, export price index, Q4 current account balance; UK February CPI, RPI, PPI, January house price index; Japan February PPI services; Germany March Ifo survey; Australia February CPI
• Thursday: US March Kansas City Fed manufacturing activity, initial jobless claims; Germany April GfK consumer confidence; France March business confidence, consumer confidence; Italy March consumer confidence index, economic sentiment, manufacturing confidence; Eurozone February M3
• Friday: US March Kansas City Fed services activity; UK March GfK consumer confidence, February retail sales; China February industrial profits