Central banks the focus this week

Oil prices are heading higher this morning after the “no talks” show between the US and Iran over the weekend – there was growing optimism on Friday that face-to-face negotiations would take place – with Brent crude now just shy of $108 per barrel. The euro and sterling though are still holding onto the gains they made against the dollar at the end of last week, trading at about $1.1730 and $1.3540 respectively (leaving EURGBP unchanged at about £0.8660). Meanwhile, the Fed, ECB and Bank of England all announce interest rate decisions this week. While all three are almost certain to keep rates on hold, they will reiterate that they are continuing to closely monitor the fall-out from the ongoing conflict in the Middle East, particularly heightened inflation risks.

Government bond yields backed up last week overall, notably at the short-end of curves. UK bonds underperformed with 2-year yields rising by the best part of 25bps, while equivalent German and US yields increased by circa 15bps and10bps respectively. In equity markets, the S&P 500 closed at a new record high on Friday, on the back of gains of almost 1%, while European stocks ended marginally lower on the day (and underperformed on the week, shedding between 2.5% and 3%).

German business confidence fell in April to its lowest level since May 2020 (in the midst of the pandemic) according to the latest ifo index published on Friday. Companies were ‘considerably more pessimistic’ about the outlook for the coming months, while their assessment of current business conditions worsened again this month.

Looking to the week ahead, as well as the round of central bank meetings, there are some notable economic data releases scheduled, including a flash estimate of Euro area inflation for April on Thursday (with headline inflation expected to have picked up further this month to 3.0%) and preliminary estimates of Euro area and US GDP growth in the first quarter of this year, also on Thursday.