Price pressure in the pipeline

US political strategist James Carville said he wants to be reincarnated as a bond market because “you can bully everybody”. So when bond yields start to signal trouble, the whole market listens.

Escalating rhetoric around the war in the Middle East led to what Deutsche Bank called “the most hawkish central bank rates of the year so far for both the (European Central Bank) and the Fed.”

Last week, sovereign bonds sold off across the board, with Europe the focal point. 10 year bundles reached their highest level since October 2023, but France’s 10 years OAT Yields rose to highs not seen since the 2011 European debt crisis. UK Gilts Following the same path, the 10-year yield hit its highest level in at least six months, driving markets to price in an 82% probability of a Bank of England rate hike this year. That’s right – a hike!

Across the Atlantic, prospects for the Federal Reserve’s ability to cut rates have fallen dramatically, pricing in a cut of just 20 basis points by the end of the year. This means that – for the first time – a 2026 rate cut by the Fed is now fully priced in, according to Deutsche Bank.

Altaf Kassam from State Street Investment Management told CNBC that “central banks may see through temporary energy shocks, but persistent inflation risks delay easing,” adding that in the event of a severe shock, there could be a renewed tightening bias.

President Donald Trump has renewed his attack on the Federal Reserve, taking to Truth Social to ask, “Where is Federal Reserve Chairman Jerome “Too Late” Powell today? He should drop interest rates immediately.”

However, in recent days traders have given up on the promise of easing from the Fed, reducing the odds of a cut this year. EY-Parthenon Chief Economist Gregory Dako said in a recent note that Powell “is likely to lead the FOMC beyond May” due to current market conditions. The Fed begins its two-day meeting on Tuesday.

ECB President Christine Lagarde said the European economy was in a good position to absorb the inflationary shock, telling France 2: “We will do everything necessary to make sure inflation is under control.”

Analysts are less convinced, with uncertainty surrounding Iran undermining the ECB’s ‘good place’ narrative, says BNP Paribas. The consensus expectation is for the central bank to hold rates on hold on Thursday, however, in a recent interview with Bloomberg, Governing Council member Peter Cazimir suggested that policymakers may raise rates sooner than expected.

The Bank of England is expected to hold interest rates at 3.75% when it meets on Thursday. In a recent note, Oxford Economics outlined a worst-case scenario where oil rises to $140 a barrel, which could push inflation higher and send the UK economy into a mild recession.

Monday: Reserve Bank of Australia Day 1

Tuesday: Reserve Bank of Australia Day 2, Federal Reserve FOMC Day 1

Wednesday: Federal Reserve FOMC Day 2, Bank of Canada

Thursday: Bank of England, European Central Bank, Swiss National Bank, Riksbank of Sweden