Araghchi maintained that given the Trump administration’s “complete lack of credibility” and the significant differences between Iran and the US on issues such as nuclear, the Strait of Hormuz, and reparations, the second round of talks is unlikely to yield substantial results. The only possible, and perhaps best-case, outcome is for both sides to extend the negotiation period again, perhaps for another two weeks. [Note — We are not sure if this would trigger another round of strikes by Trump, but suspect it will depend on the tenure of the negotiations].

Between acknowledgement that the breakeven pace of job growth has fallen to zero and the Iran war, Fed doves have moved toward hawks and delayed any expectations of rate cuts until later this year. While Fed hawks might see the case for two-sided risks to policy rates, doves still see the risks as one sided. We don’t see Fed doves as willing to seriously consider risks as two-sided until they see a more durable turn in the labor market. While we see the possibility for such a turn, it’s not yet evident in the top line data in a way that would be convincing to Fed doves.

Bottom line: The Iran-driven oil shock is likely to prompt further near-term tightening, with a May hike and the potential for one additional move later in the year. Though inflation may spike toward 5-6% in the near term as structural factors may keep it closer to 3% over the medium term, the largely supply-driven nature of the current shock and concerns about demand destruction will limit RBA tightening to what is necessary to anchor expectations rather than see the Bank embark on a prolonged hiking cycle.

The second important implication is that the dispute today over whether the cease-fire includes Israel’s attacks on Hezbollah in Lebanon, which have continued and led to Iran halting the passage of ships through Hormuz, may be in the rear-view mirror sooner rather than later, despite the hard anti-Israel rhetoric emanating today out of an emboldened leadership in Iran.

We are not sure how this is resolved but assume the massive step up overnight of Israeli attacks on Lebanon reflects a desire to create as much of a buffer space on the border before the US weighs in to curtail further strikes.

The Bank of Canada (BOC) is more likely to remain on hold this year than to deliver rate hikes, despite market pricing implying almost 50 basis points of tightening over the course of 2026.

To be fair to markets, that pricing reflects elevated oil-related risk premia and is, in part, a spillover effect from tighter global financial conditions.

But Canada’s domestic macroeconomic challenges have not materially changed so the bar for tightening is high. We expect the Bank to continue to push back against premature rate hike expectations.

As relayed from Beijing:

To prevent the ongoing US-Israel war against Iran from escalating into a regional war or even drawing in China, Russia, and European nations, Beijing and Moscow have recently engaged in intensive diplomatic consultations regarding the situation in the Middle East. China’s president Xi Jinping and Russia’s president Vladimir Putin have each, through special channels, attempted to persuade US President Donald Trump and Iran’s new Supreme Leader Mojtaba Khamenei to implement an immediate ceasefire and return to the negotiating table.

The strongest signals Xi and Putin sent to Trump and Khamenei were, respectively, do not launch a ground war against Iran, and do not close the Strait of Hormuz.

The Fed finds itself in a policy bind of its own making, having misjudged both the resilience of the labor market and the persistence of inflation, errors compounded by cutting rates too aggressively in 2025. With the March jobs report showing continued labor market strength and inflation running well above target, rate cuts are effectively off the table for the foreseeable future, with SGH assigning a limited probability to a cut in 2026.

European Central Bank (ECB) officials are squarely focused on assessing the medium-term impact of the ongoing energy crisis on euro area inflation. Beyond the length of the war, and its impact on key infrastructure, the Governing Council’s (GC) rate path will be determined by the passthrough of higher commodity prices to headline inflation, and the second-round effects it could trigger through higher wages.

The latest surveys assessing businesses’ price selling expectations, consumer inflation expectations, and input and output costs all signal the damage already done has been enough to alter the behavior and expectations of all key economic actors. This was further confirmed yesterday by the euro area March flash inflation reading, which shows headline inflation is expected to have risen from 1.9% in February to 2.5%, the highest level since June 2024.

This will require the ECB to tighten its monetary policy, and June remains the baseline scenario for a 25bps rate hike. Most officials think that hiking in April would be too hasty because while inflationary pressures are mounting, interest rates are already at neutral, inflation has been on target for a year, and inflation expectations up until last month were firmly anchored.

Bailey is trying to anchor the Committee around “patience,” and has noted that “the right place to be is on hold” while cautioning against “reaching any strong conclusions about us raising interest rates.”

He’s saying the Bank’s bias is to sit tight at least through the April 30 projection round meeting, and that the bar for tightening is high.

That’s in stark contrast to the Bank’s stance prior to the conflict when it was on the precipice of resuming rate cuts to deal with falling activity and weak labor.

Bottom Line: The Fed is stuck in a “wait and see” mode as the inflationary consequences of the Iran conflict push discussion of rate cuts not just to the back burner, but off the stove entirely. The Fed, however, would need to see a hotter labor market, and with that the threat of second order impacts on inflation from the oil shocks, before a discussion of rate hikes can begin in earnest. 

The US-Israeli war with Iran is unlikely to deter the Bank of Japan (BOJ) from nudging its policy rate to 1% at its April 27-28 meeting, despite topline slower inflation in February and the detail from the BOJ’s January policy meeting that showed Board members still agonizing over whether to declare inflation at target.

We’ve repeatedly written that the April meeting remains fully live for a 25 basis-point increase to 1%, and that we expect the BOJ will consider another move likely in July as well as a possible third move later this year (see SGH 2/24/26; “BOJ: Reported Caution Won’t Block April Hike”).

Though the timing of rate moves subsequent to April has been thrown into flux by the Middle East conflict, which sent oil prices surging, the BOJ will be even more keen to prevent energy costs from seeping into inflation expectations.

There is not yet convincing evidence that the labor market is deteriorating. Absent such deterioration, the Fed will be challenged to cut policy rates when inflation is running well above target year after year. That said, labor market data is neither unambiguously strong nor weak. On the “good news” side of the ledger is near-steady labor demand as measured by job openings, steady jobless claims indicating layoffs remain low, and ongoing wage growth above the pre-pandemic pace. On the “bad news” side of the ledger is weak and narrow job growth, a steady to slowly rising unemployment rate, a continued low job-finding rate, dour worker perceptions of the labor market, and an indication that payrolls last summer were overstated.

The Bank of England’s (BOE) threshold to a rate hike is high and only if there are signs of energy-driven inflation feeding into expectations and wage-setting behaviour would the Bank hike rates, in June or August.

In a clear gesture to its inflation mandate, the Monetary Policy Committee (MPC) set aside its pre-Iran majority preference to cut rates, and voted unanimously to pause policy at 3.75% where it will likely stay for some months.

Members don’t want to hike but they will if inflation dynamics worsen in a persistent way.

While tightening remains conditional on clear evidence of inflation persistence, to us, the balance of risks suggests a hike may ultimately not be required if the energy shock proves temporary and second-round effects fail to materialize.

Powell will be challenged to strike a dovish tone in the press conference. Rising energy prices will only further antagonize Fed hawks, who at the January FOMC meeting argued in favor of a statement that emphasized two-sided risks to the outlook. Powell downplayed any discussion of rate hikes at the January press conference, but journalists can push the question more directly this week. Powell will likely stress that with policy near neutral it is well positioned to manage the risks to both sides of the Fed’s mandate, although presumably that means hiking rates if necessary.

We expect only one dissent. We think rising oil prices provide space for both Governor Chris Waller and Vice Chair of Supervision Michelle Bowman to support holding policy despite their concerns about the job market. It’s one thing to look through higher headline inflation and not hike rates. It’s another thing to cut rates into higher headline inflation with core inflation above 3%. That’s just like embracing the 1970s. Similarly, reverse engineering an inflation forecast to maintain a one cut baseline in the SEP is also like embracing the 1970s. We expect Governor Stephen Miran to dissent. When you only have a hammer, everything is a nail.

The Reserve Bank of Australia (RBA) will likely pull forward a 25‑basis‑point rate hike to next week, completing the reversal of last year’s 75‑point easing cycle.

Soaring oil prices have added another layer of inflation risk to the Bank’s outlook, already strained by hotter‑than-expected activity and a tight labor market, with headline inflation at 3.8% and underlying inflation 3.4% in Q4 2025.

The RBA board’s language shift last meeting, from confidence in disinflation to concern about renewed price momentum spurred a higher cash rate path priced by markets.

It was solidified by Australia’s “Big Four” commercial banks all pivoting, to a March hike call from May, reflecting that the RBA wanted expectations pulled forward.

Validation

More controversial, we have sensed and written that there may be more than meets the eye to the speculation, including by senior military analysts like retired Lt. General Keith Kellogg, that US special forces may take over the southern strip of Iranian territory overlooking Hormuz and potentially even Iran’s Kharg Island terminal.

We believe the extreme degradation of Iranian defensive capabilities has left that as a realistic option, even as it, in essence, reflects doubling down on the conflict and all the political ramifications that come with it.

This all clearly increases the risk of further incidents, but results in a far more secure eventual outcome, and definable time frame.

Bottom Line: The ECB will remain on hold while assessing the magnitude and durability of the impact US-Israeli strikes on Iran have on energy prices. Traders are hearkening to former ECB President Jean-Claude Trichet’s use of the term “vigilance” that was followed by a policy error rate hike, but this ECB is not about to hike rates if and until there is clear evidence of the need to do so. The length and depth of the crisis, and broader economic backdrop, will determine whether the GC can look through the current upheaval. With the hawks, rightly, having put an end to the rate cut cycle at 2%, and inflation at target, ECB officials believe policy is appropriate. While we agree with ECB officials that it will need to be vigilant to potential changes in the medium-term inflation outlook, these will need to be clear and non-trivial to elicit a rate hike. Our call is for no hike through 2026.

The path forward hinges on the next three months of labor and inflation data, with the Fed likely to remain on hold in March and April while keeping June in play — a calculus that could shift quickly if the energy shock proves more persistent or the labor market deteriorates faster than expected.

Bottom Line:The SNB will use FX interventions to prevent a stronger franc from lowering inflation below the 0%-2% target, with Swiss officials continuing to resist cutting interest rates below 0% at their March 19 meeting. The board is willing to look through negative inflation prints this year because it continues to expect inflation to be on target over the medium term.

Bottom line: A report that Japan’s PM Sanae Takaichi expressed caution in her meeting with the BOJ’s Kazuo Ueda may reflect concern over the pace of rate hikes but not likely the direction of policy. The BOJ remains committed to data-dependent normalization, with April fully live for a 25 bps increase, a further move likely in July, and a potential third adjustment later this year if inflation and wage momentum persist. Headline noise should not be interpreted as a change in the Bank’s underlying trajectory.