Monetary Policy

US consumer price index (CPI) inflation eased more than expected in June, reducing the probability of a hike at the Federal Open Market Committee (FOMC) meeting later this month.

Wednesday’s Federal Reserve (Fed) press conference was one of the most eagerly awaited in a very long time. Kevin Warsh’s debut as chair, after three weeks in post, was not an easy one.

Yesterday, the European Central Bank (ECB) delivered a widely expected 25 basis point (bp) rate hike. becoming the first major central bank in developed markets to have raised rates in response to the Iran conflict.

UK government bond yields have pushed higher this month as markets have digested a building political crisis, with the prime minister, Sir Keir Starmer, now set to face a Labour Party leadership contest following dire local election results on May 7.

Sharp swings in government and corporate bond markets since the onset of the Middle East conflict pose interesting questions for fixed income investors.

With no end in sight to the US-Israeli war with Iran, and tensions escalating once again over the weekend, investors are bracing for more volatility. Inflation fears have ramped up significantly, reflected clearly in government bond markets where rising yields show rate cuts being priced out and rate hikes increasingly being priced in.

Recent developments involving Federal Reserve (Fed) Chair Jerome Powell have raised fresh questions around central bank independence, the politicisation of monetary policy, and the future of Fed leadership, particularly with his term as Chair due to expire in May 2026.

For global bond investors, predictable central bank activities are an important component of long-term strategy. But the Trump administration’s unprecedented pressure on the Fed, including a criminal probe of Chair Jerome Powell, is driving investor fears about the independence of the world’s most important central bank and the reliability of monetary policy.

The turbulent start to 2025 has sent many investors seeking alternatives to US assets, but in our view European fixed income can offer more than just diversification.

Softer US economic data means the pressures on UST yields now look more balanced, but headlines around President Trump’s pick for the next Fed chair are just one reason investors should expect rates volatility to continue.

The question for investors now is how much of the macro risk remains, and how well that risk is being reflected in asset valuations.

Overnight, the CDU/CSU (the winner of the latest German election) and the SPD (the leader of the current parliament set to end on March 25) announced Germany’s largest fiscal policy shift in decades.