Top stories
- There have been few signs of progress in terms of a resolution in the US-Iran conflict, and while it is positive the ceasefire remains in place, the lack of visible progress, and signals from the US that further military options are being considered, has pushed the oil price higher. Both sides have hinted at a longer conflict.
- Concerns that the conflict is set to endure for an extended period have begun to weigh on sentiment, reflected in moves higher in the oil price. Yesterday Brent Crude traded as high as $126/barrel, the highest level since 2022, before giving up gains to ease back to $114. Brent Crude was up 27% since 17 April and is up 83% this year.
- While a strong earnings season has continued to support risk appetite, the economic data has pointed to a more stagflationary backdrop. Softer growth and higher inflation were the key takeaways from the economic data this week. Meanwhile, central banks had the opportunity to opine on the outlook for inflation and rates, though as expected, all of the major central banks meeting this week kept rates on hold, choosing to monitor the situation in the Middle East and the impact on energy prices before changing policy.
- The Bank of Japan kept interest rates on hold despite forecasting a steep rise in inflation because of the war in the Middle East. Three members of the monetary policy committee voted for a rate hike. In their outlook statement, the Bank warned that Japan’s economic growth was likely to slow, while core inflation was expected to reach 2.8% for the fiscal year ending March 2027.
- The European Central Bank held steady on rates, but sent a very similar message, with Bank President Christine Lagarde commenting “the longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy”.
- Over in the US, the Federal Reserve was also on hold, albeit with four dissenting voters, three of which objected to language suggesting the Fed would eventually resume cutting interest rates. Such a lack of consensus has not been seen since 1992. In the press conference, Fed Chair Jay Powell acknowledged a “vigorous” debate about the guidance language, saying the “centre” of the FOMC was “moving towards a more neutral place” but a “majority of us didn’t feel like we needed to send a signal on that right now”. Powell said that amid the uncertainty from the Middle East, the “policy stance is in a good place for us to hold”. Markets are not pricing any rate cuts this year, having expected three cuts over the course of 2026 at the start of this year.
- The Bank of England also kept policy unchanged, with rates held at 3.75%. Governor Andrew Bailey said policy was “reasonable place given the situation of the economy and the unpredictability of events in the Middle East”.
By the numbers
0.1% – Economic growth in the Eurozone in the first quarter of 2026, slowing from 0.2% in the final quarter of 2025. Combined with inflation rising at 3.0% in April, the stagflation narrative for the eurozone is building.
2% – US growth in the first quarter on an annualised basis. The figure was lower than expected but an improvement on the 0.5% recorded in the fourth quarter of 2025.
10.5% – the return for the S&P index in April, its best month since November 2020, when the Covid vaccine was announced. Meanwhile the tech led Nasdaq index was up 15% while the Philadelphia Semiconductor index was up 38%.
Market movers
It has been a very busy week of central bank meetings, but as expected, very little by way of policy action. The central banks delivered exactly what was expected – rates on hold while they give themselves time to digest more data to gauge the economic impact of the conflict. The language was pretty consistent too; the Bank of Japan said economic risks were “skewed to the downside” while risks to prices were “skewed to the upside”, while the European Central Bank noted that “the upside risks to inflation and the downside risks to growth have intensified”. Andrew Bailey at the Bank of England made clear that market pricing (64 basis points of hikes are predicted for 2026) was no longer “in the wrong place”; six weeks ago markets were predicting 4 or 5 hikes this year. Bailey also noted that financial conditions had already tightened without Bank Rate being increased. Central banks can afford to be patient for a little longer, but rate hikes appear increasingly likely in the eurozone and the UK by the summer if we do not see the pressure easing in energy prices in the near future.
The investment lens
I’ve written at length about how we’re in a bit of a holding pattern right now awaiting more clarity of the duration of the US-Iran conflict and subsequent direction of travel for both energy prices and inflation. The inflation data this week highlights how deflationary pressures have now reversed completely with some central banks acknowledging there will be a need to act soon. We’re still a long way from talk of recessions, but ‘stagflation’ is moving up the agenda – sluggish economic growth combined with inflation heading higher, and likely to remain elevated throughout the year. Financial markets have seen a very strong recovery over the past month, following the well-worn path seen previously with geopolitical shocks, specifically a risk-off period followed by a strong recovery, despite the ‘problem’ being unresolved. A strong earnings season has been a very timely tailwind for equities, but there are economic risks building as the ‘short duration/limited impact’ thesis around the Middle East conflict begins to weaken.
There is a need for continued patience, but the increasing oil price reflects heightened concerns over an extended period of supply stress, while the incoming economic data is starting to reflect the impact of the conflict. Risk assets appear to be dismissing what is being described by the International Energy Agency as the biggest oil supply shock in history, with 14 million barrels a day absent from global supplies. With the pre-war oil deliveries from the Gulf now completed, and inventories being drawn down, supply gaps appear highly likely.
Our overall views remain positive, but we have slightly reduced our equity overweight. This move reflects the strong bounce from the lows in late March, and a lot of good news being priced in, both on the corporate earnings side and on the prevailing view of a relatively short-lived conflict causing limited economic scarring. This view is potentially being called into question.
