Middle East — Iran stalemate, OPEC cracks
The situation in the Middle East remains unresolved. The naval blockade is still in place, with only a limited number of ships able to pass through the Strait of Hormuz. Headlines during the week suggested that President Trump may be prepared to maintain the blockade in place for months, if necessary, to force Iran back to the negotiating table on its nuclear programme. Oil prices moved higher over the course of the week, with Brent briefly touching $125/bbl before retracing on Thursday. At the same time, tensions within OPEC deepened. Last Wednesday, the UAE announced its exit from OPEC and OPEC+, widening the rift with Saudi Arabia. Riyadh remains more inclined to support output cuts to keep prices elevated and fund its domestic projects, while the UAE has expanded production capacity in recent years and appears more willing to increase supply.
Fed — Hold and Farewell
Last Wednesday, the Federal Reserve left rates unchanged, as widely expected. In his final press conference as Chair, Powell said he would not step down from the Board of Governors, breaking with tradition, in order to defend the Fed’s independence. Governor Miran will therefore have to step down mechanically, leaving his seat to incoming Chair Kevin Warsh.
The tone of the press was hawkish. Powell stressed that the economy remains resilient, consumer spending is still robust, and unemployment is low by historical standards. He also said that policy is at the upper end of neutral, or slightly restrictive, leaving the Fed well positioned to assess incoming data. Powell also highlighted that the US economy is far less energy-intensive today than it was in the 1980s and 1990s. Still, markets are now pricing only a small degree of restriction in front-end rates. Warsh’s argument that trimmed-mean inflation appears softer does not seem sufficiently compelling, at this stage, to justify near-term cuts.
ECB and BoE — Ready to Move
Last week, both the ECB and the BoE left rates unchanged, in line with market expectations. Both central banks now appear to be working with three scenarios based on the future path of energy prices. At the BoE, the vote was 8-1, with Pill dissenting in favour of a hike. At the ECB, President Lagarde sounded dovish when she stressed that growth risks have increased, but she also signalled a possible hike in June. Following Lagarde’s press conference, ECB sources sounded more hawkish, suggesting that the amount of tightening required had already been discussed ahead of last week’s decision. Much will depend on second-round effects and on developments in the Middle East. Front-end rates rallied around 10 basis points on the day, also supported by more positive global sentiment. With almost three hikes priced for the ECB and more than two for the BoE in 2026, both central banks now have some time to assess the situation. However, by June, they may be forced to act to prevent the energy shock from feeding into broader inflation and further weighing on their economies.
Algebris Investments’ Global Credit Team
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