Sive Morten
Special Consultant to the FPA
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FUNDAMENTALS
Despite that hype around M. East conflict is not fading, this week, finally we've got a lot of economy data, statistics that give a lot of reasons to think about situation in EU and US. Sentiment of big central banks is changing and expectations on soon rate cut is fading. This happens on a background of uncertainty, when nobody knows yet the total effect of oil crisis.
MARKET OVERVIEW
Major central banks left interest rates unchanged this week but warned that they could raise them soon to prevent a jump in energy prices, caused by the U.S.-Israeli war with Iran, spilling over into a surge in broader inflation.
The dollar was headed for its biggest weekly loss against the yen since February on Friday after Japan was reported to have intervened to support its currency.
The European Central Bank and the Bank of England held interest rates steady on Thursday, in line with expectations, following earlier pauses by the Federal Reserve and the Bank of Japan. However, both the ECB and BOJ signalled they could begin raising rates as soon as June to curb inflationary pressure stemming from higher imported energy costs.
The Federal Reserve also left rates unchanged on Wednesday, with one policymaker dissenting in favor of a rate cut and three others dissenting because they felt the U.S. central bank's policy statement should no longer communicate a bias toward monetary policy easing. The Fed’s 8–4 vote marked its most divided decision since 1992, underscoring the challenge incoming Fed Chair Kevin Warsh will face in pushing for rate cuts. Speaking at a press conference, Powell said that despite dissent from four officials who opposed maintaining an easing bias, he does not see the Fed tilting toward raising interest rates.
Warsh is expected to advocate for rate cuts, though surging energy prices linked to the Iran conflict could make other members of the central bank's policy-setting Federal Open Market Committee cautious.
Indeed, following the meeting, futures pricing indicated markets had ruled out cuts for the remainder of the year. But not everyone had taken rate cuts off the table entirely this year. Analysts at Citi said in a note that they continue "to project that cooler inflation and renewed loosening labor markets" will lead to rate reductions in September, adding that "rate cuts can be rapidly priced back in by markets if oil prices fall."
JPMorgan Chase CEO Jamie Dimon said on Tuesday he is not worried about inflation, but added among the worst-case scenarios for the economy is the risk of stagflation. Dimon reiterated his view that a credit market downturn could be worse than expected.
The shock is tightening overall financial conditions across developed markets, though the impact remains limited in many countries, according to widely tracked Goldman Sachs indexes. Conditions have tightened modestly in the euro zone and Japan, driven by rising borrowing costs and falling equities. Britain stands out, with a much sharper tightening that points to a heavier growth hit.
Jefferies chief European economist Mohit Kumar said both the scale and nature of the stagflation shock differ across regions. U.S. business activity picked up in April, though output prices jumped. Consumer inflation expectations for the year ahead jumped to 4.7% this month from 3.8% in March, while market-based gauges have also moved higher.
Efforts to resolve the conflict have hit an impasse, which the U.S. is trying to unlock with a naval blockade of Iran's oil exports, Tehran's economic lifeline. U.S. President Donald Trump is due to receive a briefing on Thursday on plans for a series of fresh military strikes on Iran.
Global brokerages have gradually stepped back from earlier expectations of two U.S. interest rate cuts in 2026, with forecasts now split between some easing and none due to lingering inflation risks and cautious policymakers. Morgan Stanley became the latest brokerage to drop expectations for rate cuts this year. At least eight brokerages, including J.P. Morgan and HSBC, bet on no rate cuts this year. Meanwhile, eight brokerages expect between 25 and 75 basis points (bps) of easing this year, with the majority of them expecting two 25 bps cuts.
Traders are now pricing in roughly a 40.5% probability of a rate hike by April 2027, up from about 8% before the Fed announced its decision, according to CME Fedwatch tool. "We see risks to our baseline view as skewed toward delayed rate cuts," Barclays said, which expects one 25 bps cut in September.
Data on Thursday showed euro zone inflation rose to 3% in April while the economy grew just 0.1% in the first quarter. Contracting business activity, tighter bank lending criteria and surging inflation expectations signal mounting pressure. Germany's IMK institute sees a 34% chance the bloc's largest economy slips into recession in the second quarter, up from 12% in March. ING's head of global macro Carsten Brzeski said another month of Hormuz disruption would likely trigger at least a technical euro zone recession.
The ECB's Consumer Expectations Survey showed inflation expectations for one year ahead jumped to 4.0% in March from 2.5% a month earlier while bets for three years out rose to 3.0% from 2.5%, both well above the ECB's 2% target. Policymakers may take some comfort in longer term inflation expectations, which barely moved in either the consumer or business survey.
European Central Bank policymakers are likely to raise interest rates at least twice, starting at their next meeting in June, unless a favourable resolution to the Iran conflict quickly drags energy prices to pre-war levels, two sources close to the discussion told Reuters. Citing the ECB's baseline projections, published in March, the sources said at least two rate hikes should be expected in this scenario. Some of these prospects were already discussed at Thursday's meeting, when a few policymakers argued in favour of a rate increase. One of the sources said that Thursday's discussion was mostly about June and there was little disagreement around the table that policy action will be necessary, unless there is a fundamental change in the outlook. Consumers expect a deep recession while banks see both a fall in loan demand and a rise in lending costs.
The European Commission Economic Sentiment Indicator fell to 93.0 this month from 96.6 a month earlier, coming well below expectations as the services component plunged to a five-year low. Selling price expectations meanwhile soared, after an already steep increase in the previous month, indicating that firms anticipate continued acceleration in overall inflation given high energy costs and possible supply shortages.
Eurostat said gross domestic product in the 21-country currency area rose 0.1% quarter-on-quarter in the three months to March, according to a flash reading. A string of surveys this week points to a further slowdown in activity, as it is mentioned above.
UK business activity has held up better so far, but risks are rising. The IMF hit Britain with the biggest growth downgrade among rich economies. Reflecting inflation worries, borrowing costs in Europe have risen faster than elsewhere as traders bet on higher UK and euro zone rates. Britain's two-year yields are up a percentage point since the war began.
WHAT IS HIDDEN
So the American consumer has become gloomy: the sentiment index is 49.8, which is at a historic low since the 1950s. Inflation expectations for the year are 4.7%, and for five years - 3.5%. Consumer sentiment has plummeted in the eurozone and the UK. Although for now, everything is being smoothed out with subsidies, and the market is confident that the budgets and central banks will save everyone.
In general, the situation is such that, at least in the next quarter or two, prices will be high, even if everything is resolved "tomorrow", although there is currently little chance of any quick solutions. The risk of falling to $150 is now higher than the risk of rising, although it is clear that Trump and Co. are extremely nervous about any approach to $120 per barrel, and indeed, holding above this level allows the market to hope that everything will "blow over". A consolidation above this level would force a review of these views.
Everybody talk about oil, but somehow misses the other thing. The average inflation for companies producing food and beverages increased by +7.9% year-on-year in March, which is the biggest jump in the last 12 months. This is +373 basis points more than +4.2% in February. The biggest jump was recorded for tomatoes - +102% year-on-year. Bearing in mind that no one plans to call it a day, in such a tempo we could hit 10% this year. And not just in food prices.
The K-shaped economy is in a tailspin: Americans' financial situation in 2026 is also historically bad. According to Gallup, a record 55% of Americans now believe that their financial situation is getting worse - a higher level than during the Great Depression and the pandemic. Although this figure is similar to last year's 53%, it is higher than 47% in 2024, and this is the fifth consecutive year that more Americans say that their financial situation is getting worse rather than improving.
Situation in EU is hardly better. The Eurozone Economic Sentiment Index (ESI) fell for the third consecutive month to 93.0 in April 2026, reaching its lowest level since November 2020 and failing to meet market expectations of 95.2, reflecting growing concerns about economic prospects triggered by the escalation of the war with Iran. Sentiment deteriorated across all sectors - consumption, retail, services etc.. As for pricing, consumer inflation expectations rose by 5.6 points to 49.1, the highest level since April 2022, while producers' expectations regarding selling prices increased by 10.2 points, reaching a three-year high of 31.1.
In the Fed "Hawks" are increasing pressure - disagreements are growing ... Powell is leaving, but not leaving. the "hawks" rebelled a bit: Hammer, Kashkari, and Logan were against the wording in the press release, which indicates a "bias towards easing". Miran, as usual, wants a reduction of 0.25 p.p. Powell does not plan to leave the FED until the issue of criminal cases is finally resolved, remaining a member of the Board of Governors. According to Powell, the number of those in the FED who oppose maintaining a soft signal has increased (apparently, not only among voting members of the FOMC, but no one is advocating for a rate hike "right now". The situation will clarify in the next month or two. Although Powell generally smoothed out the corners, as he usually does, it is obvious that a split is forming in the FED with a shift of votes towards a more stringent policy. After all, Jerome Powell says the Fed's independence is "under threat."
BoE and ECB are in a classic stagflationary dilemma: high inflation + weak growth. ECB: "The risks of rising inflation and the risks of slowing economic growth have intensified". For now, the statements are cautious, just like the Fed's - we need to wait for more clarity, so there are no direct signals about decisions on any policy changes, of course. Although the ECB slightly more clearly recognizes inflation risks, but at the Bank of England, one vote has already been for a rate hike of 0.25 p.p.
it is obvious that for now they are rather trying to smooth out the processes with rhetoric and are not ready for any reaction. But the scenarios suggest a risk of inflation rising to ~6% for both central banks. The Bank of England estimates that in this case it may need to raise the rate by 50-150 b.p. The yield on 30-year UK bonds on the day rewrote the 1999 highs, amounting to 5.7% per annum ... and the national debt will objectively be a strong constraint on the response to the inflationary shock.
Concerning the US GDP data, here is also a few interesting moments. The contribution of household consumption to the GDP growth of 1.1 percentage points was solely due to the consumption of services, while there was stagnation in goods (only prices are rising). In March, Americans' spending increased by 0.9% month-on-month. More than 2/5 of the total increase in spending was due to the rise in gasoline prices. Energy prices jumped by 11.6% month-on-month and 14.6% year-on-year, which was the main reason for the acceleration of inflation.
Powell's favorite indicator - the price index for services excluding housing - is growing by 0.3% month-on-month and 3.5% year-on-year, showing steady 3-4% growth per year. In fact, to the steady inflation of 3%+, which the Fed has not yet brought back to target values due to its "dovishness", are added shocks from tariffs and energy prices, forming a stagflationary agenda.
And now we're coming to most important thing that we talked about a couple weeks ago - Money supply dynamic. Particularly money supply should answer on the question on what way we're stepping in - either contraction of economy, deflation, and recession or stagflation. And now it seems that we're going on the 2nd way. First is, check the Fed balance. the Fed has added about 200 billion US Treasury bonds to its balance sheet over the past few months. Moderate quantitative easing is the new trend:
Well, we can say that the main intrigue of the last two months has been resolved - the money supply has indeed accelerated in the US due to rising energy prices. And this is just March. Moreover, the growth of the money supply in March was as high as 2%, which is terrifying in annual terms if you calculate it.
It doesn't look much like COVID yet (Grey area on the chart below). For now. By the end of May, we'll see what happened in April, when oil prices rose even more. Moreover, it's interesting to see why the S&P 500 hit a new all-time high in the first days of April and what fueled it.
Despite that hype around M. East conflict is not fading, this week, finally we've got a lot of economy data, statistics that give a lot of reasons to think about situation in EU and US. Sentiment of big central banks is changing and expectations on soon rate cut is fading. This happens on a background of uncertainty, when nobody knows yet the total effect of oil crisis.
MARKET OVERVIEW
Major central banks left interest rates unchanged this week but warned that they could raise them soon to prevent a jump in energy prices, caused by the U.S.-Israeli war with Iran, spilling over into a surge in broader inflation.
The dollar was headed for its biggest weekly loss against the yen since February on Friday after Japan was reported to have intervened to support its currency.
The European Central Bank and the Bank of England held interest rates steady on Thursday, in line with expectations, following earlier pauses by the Federal Reserve and the Bank of Japan. However, both the ECB and BOJ signalled they could begin raising rates as soon as June to curb inflationary pressure stemming from higher imported energy costs.
The Federal Reserve also left rates unchanged on Wednesday, with one policymaker dissenting in favor of a rate cut and three others dissenting because they felt the U.S. central bank's policy statement should no longer communicate a bias toward monetary policy easing. The Fed’s 8–4 vote marked its most divided decision since 1992, underscoring the challenge incoming Fed Chair Kevin Warsh will face in pushing for rate cuts. Speaking at a press conference, Powell said that despite dissent from four officials who opposed maintaining an easing bias, he does not see the Fed tilting toward raising interest rates.
Warsh is expected to advocate for rate cuts, though surging energy prices linked to the Iran conflict could make other members of the central bank's policy-setting Federal Open Market Committee cautious.
Indeed, following the meeting, futures pricing indicated markets had ruled out cuts for the remainder of the year. But not everyone had taken rate cuts off the table entirely this year. Analysts at Citi said in a note that they continue "to project that cooler inflation and renewed loosening labor markets" will lead to rate reductions in September, adding that "rate cuts can be rapidly priced back in by markets if oil prices fall."
JPMorgan Chase CEO Jamie Dimon said on Tuesday he is not worried about inflation, but added among the worst-case scenarios for the economy is the risk of stagflation. Dimon reiterated his view that a credit market downturn could be worse than expected.
The shock is tightening overall financial conditions across developed markets, though the impact remains limited in many countries, according to widely tracked Goldman Sachs indexes. Conditions have tightened modestly in the euro zone and Japan, driven by rising borrowing costs and falling equities. Britain stands out, with a much sharper tightening that points to a heavier growth hit.
Jefferies chief European economist Mohit Kumar said both the scale and nature of the stagflation shock differ across regions. U.S. business activity picked up in April, though output prices jumped. Consumer inflation expectations for the year ahead jumped to 4.7% this month from 3.8% in March, while market-based gauges have also moved higher.
Efforts to resolve the conflict have hit an impasse, which the U.S. is trying to unlock with a naval blockade of Iran's oil exports, Tehran's economic lifeline. U.S. President Donald Trump is due to receive a briefing on Thursday on plans for a series of fresh military strikes on Iran.
Global brokerages have gradually stepped back from earlier expectations of two U.S. interest rate cuts in 2026, with forecasts now split between some easing and none due to lingering inflation risks and cautious policymakers. Morgan Stanley became the latest brokerage to drop expectations for rate cuts this year. At least eight brokerages, including J.P. Morgan and HSBC, bet on no rate cuts this year. Meanwhile, eight brokerages expect between 25 and 75 basis points (bps) of easing this year, with the majority of them expecting two 25 bps cuts.
Traders are now pricing in roughly a 40.5% probability of a rate hike by April 2027, up from about 8% before the Fed announced its decision, according to CME Fedwatch tool. "We see risks to our baseline view as skewed toward delayed rate cuts," Barclays said, which expects one 25 bps cut in September.
Data on Thursday showed euro zone inflation rose to 3% in April while the economy grew just 0.1% in the first quarter. Contracting business activity, tighter bank lending criteria and surging inflation expectations signal mounting pressure. Germany's IMK institute sees a 34% chance the bloc's largest economy slips into recession in the second quarter, up from 12% in March. ING's head of global macro Carsten Brzeski said another month of Hormuz disruption would likely trigger at least a technical euro zone recession.
The ECB's Consumer Expectations Survey showed inflation expectations for one year ahead jumped to 4.0% in March from 2.5% a month earlier while bets for three years out rose to 3.0% from 2.5%, both well above the ECB's 2% target. Policymakers may take some comfort in longer term inflation expectations, which barely moved in either the consumer or business survey.
European Central Bank policymakers are likely to raise interest rates at least twice, starting at their next meeting in June, unless a favourable resolution to the Iran conflict quickly drags energy prices to pre-war levels, two sources close to the discussion told Reuters. Citing the ECB's baseline projections, published in March, the sources said at least two rate hikes should be expected in this scenario. Some of these prospects were already discussed at Thursday's meeting, when a few policymakers argued in favour of a rate increase. One of the sources said that Thursday's discussion was mostly about June and there was little disagreement around the table that policy action will be necessary, unless there is a fundamental change in the outlook. Consumers expect a deep recession while banks see both a fall in loan demand and a rise in lending costs.
The European Commission Economic Sentiment Indicator fell to 93.0 this month from 96.6 a month earlier, coming well below expectations as the services component plunged to a five-year low. Selling price expectations meanwhile soared, after an already steep increase in the previous month, indicating that firms anticipate continued acceleration in overall inflation given high energy costs and possible supply shortages.
Eurostat said gross domestic product in the 21-country currency area rose 0.1% quarter-on-quarter in the three months to March, according to a flash reading. A string of surveys this week points to a further slowdown in activity, as it is mentioned above.
UK business activity has held up better so far, but risks are rising. The IMF hit Britain with the biggest growth downgrade among rich economies. Reflecting inflation worries, borrowing costs in Europe have risen faster than elsewhere as traders bet on higher UK and euro zone rates. Britain's two-year yields are up a percentage point since the war began.
WHAT IS HIDDEN
So the American consumer has become gloomy: the sentiment index is 49.8, which is at a historic low since the 1950s. Inflation expectations for the year are 4.7%, and for five years - 3.5%. Consumer sentiment has plummeted in the eurozone and the UK. Although for now, everything is being smoothed out with subsidies, and the market is confident that the budgets and central banks will save everyone.
In general, the situation is such that, at least in the next quarter or two, prices will be high, even if everything is resolved "tomorrow", although there is currently little chance of any quick solutions. The risk of falling to $150 is now higher than the risk of rising, although it is clear that Trump and Co. are extremely nervous about any approach to $120 per barrel, and indeed, holding above this level allows the market to hope that everything will "blow over". A consolidation above this level would force a review of these views.
Everybody talk about oil, but somehow misses the other thing. The average inflation for companies producing food and beverages increased by +7.9% year-on-year in March, which is the biggest jump in the last 12 months. This is +373 basis points more than +4.2% in February. The biggest jump was recorded for tomatoes - +102% year-on-year. Bearing in mind that no one plans to call it a day, in such a tempo we could hit 10% this year. And not just in food prices.
The K-shaped economy is in a tailspin: Americans' financial situation in 2026 is also historically bad. According to Gallup, a record 55% of Americans now believe that their financial situation is getting worse - a higher level than during the Great Depression and the pandemic. Although this figure is similar to last year's 53%, it is higher than 47% in 2024, and this is the fifth consecutive year that more Americans say that their financial situation is getting worse rather than improving.
Situation in EU is hardly better. The Eurozone Economic Sentiment Index (ESI) fell for the third consecutive month to 93.0 in April 2026, reaching its lowest level since November 2020 and failing to meet market expectations of 95.2, reflecting growing concerns about economic prospects triggered by the escalation of the war with Iran. Sentiment deteriorated across all sectors - consumption, retail, services etc.. As for pricing, consumer inflation expectations rose by 5.6 points to 49.1, the highest level since April 2022, while producers' expectations regarding selling prices increased by 10.2 points, reaching a three-year high of 31.1.
In the Fed "Hawks" are increasing pressure - disagreements are growing ... Powell is leaving, but not leaving. the "hawks" rebelled a bit: Hammer, Kashkari, and Logan were against the wording in the press release, which indicates a "bias towards easing". Miran, as usual, wants a reduction of 0.25 p.p. Powell does not plan to leave the FED until the issue of criminal cases is finally resolved, remaining a member of the Board of Governors. According to Powell, the number of those in the FED who oppose maintaining a soft signal has increased (apparently, not only among voting members of the FOMC, but no one is advocating for a rate hike "right now". The situation will clarify in the next month or two. Although Powell generally smoothed out the corners, as he usually does, it is obvious that a split is forming in the FED with a shift of votes towards a more stringent policy. After all, Jerome Powell says the Fed's independence is "under threat."
BoE and ECB are in a classic stagflationary dilemma: high inflation + weak growth. ECB: "The risks of rising inflation and the risks of slowing economic growth have intensified". For now, the statements are cautious, just like the Fed's - we need to wait for more clarity, so there are no direct signals about decisions on any policy changes, of course. Although the ECB slightly more clearly recognizes inflation risks, but at the Bank of England, one vote has already been for a rate hike of 0.25 p.p.
it is obvious that for now they are rather trying to smooth out the processes with rhetoric and are not ready for any reaction. But the scenarios suggest a risk of inflation rising to ~6% for both central banks. The Bank of England estimates that in this case it may need to raise the rate by 50-150 b.p. The yield on 30-year UK bonds on the day rewrote the 1999 highs, amounting to 5.7% per annum ... and the national debt will objectively be a strong constraint on the response to the inflationary shock.
Concerning the US GDP data, here is also a few interesting moments. The contribution of household consumption to the GDP growth of 1.1 percentage points was solely due to the consumption of services, while there was stagnation in goods (only prices are rising). In March, Americans' spending increased by 0.9% month-on-month. More than 2/5 of the total increase in spending was due to the rise in gasoline prices. Energy prices jumped by 11.6% month-on-month and 14.6% year-on-year, which was the main reason for the acceleration of inflation.
Powell's favorite indicator - the price index for services excluding housing - is growing by 0.3% month-on-month and 3.5% year-on-year, showing steady 3-4% growth per year. In fact, to the steady inflation of 3%+, which the Fed has not yet brought back to target values due to its "dovishness", are added shocks from tariffs and energy prices, forming a stagflationary agenda.
And now we're coming to most important thing that we talked about a couple weeks ago - Money supply dynamic. Particularly money supply should answer on the question on what way we're stepping in - either contraction of economy, deflation, and recession or stagflation. And now it seems that we're going on the 2nd way. First is, check the Fed balance. the Fed has added about 200 billion US Treasury bonds to its balance sheet over the past few months. Moderate quantitative easing is the new trend:
Well, we can say that the main intrigue of the last two months has been resolved - the money supply has indeed accelerated in the US due to rising energy prices. And this is just March. Moreover, the growth of the money supply in March was as high as 2%, which is terrifying in annual terms if you calculate it.
It doesn't look much like COVID yet (Grey area on the chart below). For now. By the end of May, we'll see what happened in April, when oil prices rose even more. Moreover, it's interesting to see why the S&P 500 hit a new all-time high in the first days of April and what fueled it.
