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Global Monthly - It takes three to TACO
- Macro economy
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With the Iran conflict ongoing and the chance of a ceasefire uncertain, we update our base case for growth, inflation and interest rates. We assume severe energy disruptions last until the end of May, and this could happen even if the conflict ends relatively soon. The inflation impact of the energy shock continues to outweigh the growth hit, and central bank responses are therefore likely to tilt hawkish. We now expect the ECB to hike rates twice in Q2, and the Fed to delay cuts to Q4. Both central banks are expected to cut rates in 2027.
ECB Watch - ECB has moved to a tightening bias
- Macro economy
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Although the ECB’s communication was not particularly hawkish following the March Governing Council meeting, we still think it has effectively moved towards a tightening bias.
ECB set for hawkish pivot
- Macro economy
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The ECB’s March meeting promises to be the most interesting in a while with the ‘good place’ on interest rates challenged by the energy shock. The cut off date for the projections was most likely just before the war, so the energy shock will only be very modestly included. However, the ECB will also likely present scenarios that better capture recent developments, which will indicate that they may need to act. In addition, we expect the general tone of the communication to be a lot more hawkish. Uncertainty on the conflict is high, but if the current situation persists through to the April meeting, a hike becomes a distinct possibility
Macro scenarios of the Iran conflict
- Macro economy
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The conflict in between the US-Israel and Iran has entered its 11th day. Geopolitical risk, as measured by the GPR index, has spiked to levels last seen around the Iraq invasion in 2003, and has remained highly elevated since. Since our initial publication last week Monday, it has been a rollercoaster ride for both oil and gas markets [1]. Given the ongoing uncertainty around the duration and impact of the conflict, we have put together three scenarios exploring how the macro-economic impact could evolve over the coming months, focused on the US and eurozone, and with the implications for the ECB and Fed’s key policy rates. We will follow up this note with updates on how we see these scenarios impacting bond and FX markets in the coming days.
Implications of Middle East escalation
- Macro economy
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The military escalation in the Middle East threatens the economy because of the disruption to energy supplies and increased uncertainty. Energy infrastructure has not yet been significantly impacted, but that remains a risk as air strikes continue to rage. Shipping through the Strait of Hormuz - one of the world's most important energy choke points - has come to a near stand-still. Any sustained energy price shock would have more noticeable effects on inflation than growth. We present inflation scenarios assuming oil at USD 80 per barrel, 100 and 130; in all cases inflation spikes in 2026 but falls back in 2027 . For monetary policy, the duration of the shock is crucial, as are second round effects, given the focus on the medium term.
Global Monthly - Geopolitics bad, macro good
- Macro economy
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While the risks have certainly not gone away, economic data has been generally firming, while near term positive impulses are getting stronger. Higher AI capex spending looks to be bigger than expected, fiscal stimulus is ramping up and financial conditions remain easy. So far geopolitics has been the dog, which barks very loudly, but does not bite. That cannot be taken for granted with Iran the latest flashpoint. SCOTUS decision to scrap IEEPA tariffs may not change too much, not least because fresh tariffs have largely replaced the old ones. There is an increasing chance that the global economy may run hot in the near term but also of a future hangover further down the line.
The changing of the guard at the ECB
- Macro economy
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The Financial Times reported this morning that ECB President Christine Lagarde will leave her post before her term expires in October 2027. The reported reason is that she wants to exit before the French presidential election in April of next year, which would allow French President Macron - together with German Chancellor Merz - to be in the driver’s seat when it comes to selecting a new ECB President. The ECB did not fully deny the story, but responded by saying that Lagarde had ‘not taken any decision’.
Kevin Warsh’s Reverse Operation Twist
- Macro economy
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The Trump administration would like to see long-term interest going down yet oddly Warsh’s vision of the Fed appears to imply the opposite. There is a trinity of steepening policies, though in this note we focus on his policy to rein in the footprint of the central bank’s balance sheet. Shrinking the balance sheet would need the Fed to go back to a scarce reserves policy, which would make it more difficult to set interest rates. More likely is for it to reduce the skew of its Treasury holdings towards longer-term securities to market-neutral in a Reverse Operation Twist. The Fed’s Operation Twist in 2011-2012 flattened the curve and lowered the term premium and this would likely have the opposite impact. The US Treasury could alter its issuance policy, in effect conducting its own Operation Twist as part of a 2026 Fed-Treasury accord. The rising funding needs of the US government could still make these shifts challenging, meaning they are more likely to be gradual.
Euro not yet an issue for the ECB
- Macro economy
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The ECB has been saying for months that interest rates are in a good place, and today it repeated this message following its Governing Council meeting.
Spotlight - Geopolitical risk is back with a vengeance
- Macro economy
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Geopolitical risks have flared up in a dramatic fashion at the start of the year. We present a framework to analyse the main channels of impact for the economy. The Greenland dispute risks escalating economic warfare between the EU and the US and an undermining of NATO, while the risks surrounding Iran revolve around oil supply. Threats to Fed independence could destabilise inflation expectations, but Chair Powell remains defiant.
