Global Economy & Markets, Weekly Roundup 05/05/26
Major central banks stood pat, grappling with the challenge of how to fend off inflation without generating much downward pressure on output
Global equity markets were modestly up on a weekly basis, with US bourses marching on to fresh record highs (S&P500: +0.9% to 7230) in view, inter alia, of strong corporate results for Q1:2026. Notably, the S&P500 rose by +10.4% mom in April, the largest monthly gain since 2020, with Semiconductors in the driver’s seat (+27.3% mom) as the AI investment theme was reinvigorated. The AI factor rationalizes the recent overperformance of US and EM Asia equity indices.
Investors appear to maintain a rather benign approach regarding (i) the timing and speed of the potential restoration of energy trade flows from the Middle East and (ii) the fragility of the ceasefire (operation “Project Freedom”). For the time being, energy disruptions continue, leading commodity prices higher (e.g. reference Brent price: c. +3% wow to $108/barrel, albeit with elevated volatility), in turn feeding through to higher inflation expectations and government bond yields.
The rise was relatively more notable in shorter-term tenors, which tend to correlate more closely with monetary policy prospects (e.g. US Treasury 2-year yield: +11 bps wow to 3.89% and Germany’s Bund 2-year yield: +7 bps wow 2.63%), with a slightly hawkish Fed adding to the upside. While the Fed remained on hold, as expected, three out of the twelve voting members of the FOMC, despite supporting unchanged interest rates, argued against maintaining an easing bias in the statement. One member (Miran) continued to vote for a -0.25% cut in the FFR (3.75%).
Having said that, all major central banks stood pat (Fed, ECB, BoJ), waiting for more information regarding the situation in the Middle East and its economic impact. Overall though, they appear in the current juncture to assign a somewhat larger weight on the upside risks to inflation (arguing in favor of hawkishness) versus the downside ones to economic growth (which would argue for dovishness).
ECB President Lagarde in the Press conference suggested a hiking bias, citing that the other option debated in the meeting, was increasing the DFR (2.00%). In addition, Mrs. Lagarde continued to acknowledge the prospect of rate hikes, as also embedded in the economic scenarios presented in March, for which a clear deviation from the baseline was noted, towards the more adverse scenario of higher inflation and lower real GDP growth. Inflation risks are skewed to the upside, and growth risks to the downside, highlighting the difficult trade-off the ECB is currently facing.
According to OIS pricing, investors now all but fully price-in a +0.25% hike in the DFR in the next meeting on June 11th. Investors assign roughly equal chances of +0.75% or +1.00% of cumulative hikes in the next 12 months, with the respective curve moving up by c. +15 bps in the past week, albeit market pricing seems slightly hawkish, in our view.
On the economic data front, euro area headline CPI inflation posted a further substantial acceleration in April, to +3.0% yoy from +2.6% yoy in March (and +1.9% yoy in February). That development was anticipated in view of higher Energy prices (+10.9% yoy from +5.1% yoy in March and -3.1% yoy in February). Higher energy costs pass through to other prices usually with a time lag, and as a result, the annual growth of core CPI decelerated slightly to +2.2% from +2.3% in March.
At the same time, according to the first preliminary estimate, euro area real GDP posted sub-par growth of +0.1% qoq (+0.2% excluding Ireland) from +0.2% qoq in Q4:2025 (+0.4% excluding Ireland), with the annual pace decelerating to +0.8% from +1.3% yoy in Q4:2025.
Global equity markets were modestly up on a weekly basis, with US bourses marching on to fresh record highs (S&P500: +0.9% to 7230) in view, inter alia, of strong corporate results for Q1:2026. Notably, the S&P500 rose by +10.4% mom in April, the largest monthly gain since 2020, with Semiconductors in the driver’s seat (+27.3% mom) as the AI investment theme was reinvigorated. The AI factor rationalizes the recent overperformance of US and EM Asia equity indices.
Investors appear to maintain a rather benign approach regarding (i) the timing and speed of the potential restoration of energy trade flows from the Middle East and (ii) the fragility of the ceasefire (operation “Project Freedom”). For the time being, energy disruptions continue, leading commodity prices higher (e.g. reference Brent price: c. +3% wow to $108/barrel, albeit with elevated volatility), in turn feeding through to higher inflation expectations and government bond yields.
The rise was relatively more notable in shorter-term tenors, which tend to correlate more closely with monetary policy prospects (e.g. US Treasury 2-year yield: +11 bps wow to 3.89% and Germany’s Bund 2-year yield: +7 bps wow 2.63%), with a slightly hawkish Fed adding to the upside. While the Fed remained on hold, as expected, three out of the twelve voting members of the FOMC, despite supporting unchanged interest rates, argued against maintaining an easing bias in the statement. One member (Miran) continued to vote for a -0.25% cut in the FFR (3.75%).
Having said that, all major central banks stood pat (Fed, ECB, BoJ), waiting for more information regarding the situation in the Middle East and its economic impact. Overall though, they appear in the current juncture to assign a somewhat larger weight on the upside risks to inflation (arguing in favor of hawkishness) versus the downside ones to economic growth (which would argue for dovishness).
ECB President Lagarde in the Press conference suggested a hiking bias, citing that the other option debated in the meeting, was increasing the DFR (2.00%). In addition, Mrs. Lagarde continued to acknowledge the prospect of rate hikes, as also embedded in the economic scenarios presented in March, for which a clear deviation from the baseline was noted, towards the more adverse scenario of higher inflation and lower real GDP growth. Inflation risks are skewed to the upside, and growth risks to the downside, highlighting the difficult trade-off the ECB is currently facing.
According to OIS pricing, investors now all but fully price-in a +0.25% hike in the DFR in the next meeting on June 11th. Investors assign roughly equal chances of +0.75% or +1.00% of cumulative hikes in the next 12 months, with the respective curve moving up by c. +15 bps in the past week, albeit market pricing seems slightly hawkish, in our view.
On the economic data front, euro area headline CPI inflation posted a further substantial acceleration in April, to +3.0% yoy from +2.6% yoy in March (and +1.9% yoy in February). That development was anticipated in view of higher Energy prices (+10.9% yoy from +5.1% yoy in March and -3.1% yoy in February). Higher energy costs pass through to other prices usually with a time lag, and as a result, the annual growth of core CPI decelerated slightly to +2.2% from +2.3% in March.
At the same time, according to the first preliminary estimate, euro area real GDP posted sub-par growth of +0.1% qoq (+0.2% excluding Ireland) from +0.2% qoq in Q4:2025 (+0.4% excluding Ireland), with the annual pace decelerating to +0.8% from +1.3% yoy in Q4:2025.