Key Takeaways
- In the coming days Kevin Warsh is set to be sworn in as the new Federal Reserve Chair.
- US equities remain buoyant, but inflation is picking up – a trend that has real implications for the direction of interest rates.
- US headline CPI stands at 3.8% and the sustained nature of higher energy prices suggests inflationary pressures are set to persist.
- Government bond yields are already higher, and it will take better news out of the Middle East to ease pressures.
- Expectations of rate cuts have been replaced by anticipated interest rate hikes. The ECB could move first with the Bank of England and Federal Reserve following over the summer.
This week we focus on central banks and what happens next for new Federal Reserve (Fed) Chair Kevin Warsh. He is due to be sworn in at some point over the coming days, having been approved by the Senate last week.
When looking at US equity markets you would expect all to be well in the US economy. The inflation picture, however, is becoming more concerning. Last week, CPI numbers were published for April with the headline level standing at 3.8% – its highest for five years. We also saw core inflation nudge upwards and a rise in PPI data. Prices for goods leaving factories were shown to be climbing at around 6%.
These trends illustrate that inflation is really starting to pick up – all at a time when expectations were previously anchored around it easing over the course of 2026. The energy price shock is the driving factor behind this reversal, with oil priced at around $110 per barrel at the time of writing. Further out, prices are expected to remain around $90 per barrel – meaningfully higher than it was before conflict broke out. This shift in pricing means the current situation is less of an oil price spike and more of a sustained increase in energy costs. This in turn increases risks around inflationary data further down the line and raises the chances of central banks having to hike rates at some point.
Financial conditions have already tightened – a situation that is clearly apparent in global bond markets where yields are pushing much higher. Although the UK has made headlines because of the associated political issues, bond yields are trending higher across many developed markets. This reflects the expectation that inflation is likely to be higher for longer thanks to elevated energy costs.
And, of course, the Strait of Hormuz remains closed. The situation there remains uncertain with little expectation around any resolution in the short term, but any agreement would be warmly greeted by markets.
In terms of what happens next, we will be looking closely at UK inflation numbers set for release later this week. The number is expected to be above 3% so, as in the US, numbers are heading in the wrong direction with scope for further appreciation over the summer.
We anticipate some upward moves in rates in the coming months with the European Central Bank likely to move first at their next meeting. The Bank of England could wait a while longer, but we expect a rise from them in July. For the Fed, expectations have moved a long way over the course of the year, from aggressive cuts under the new leadership to markets now pricing in rate rises over the next 12-18 months. Against this backdrop it is unsurprising to see bond yields trend higher – a situation that is unlikely to change until we get some better news out of the Middle East.
