The hope was that US President Donald Trump would appease markets with concrete steps towards ending the war in the Middle East. Unfortunately, the rhetoric appeared largely unchanged, keeping markets on edge. Today is the last day before the start of a long weekend, with US markets closed on Friday; in Europe, Monday will also be a bank holiday. As such, we doubt oil can move materially lower, and risk sentiment should stay fragile.
In effect, that means the upward pressure on the front end of the curve will stay. The 5Y and 10Y points might face less upward pressure as growth concerns over the medium term intensify. Inflation markets continue to be positioned for a short-lived inflation spike, which then begs the question of how much easing central banks follow up with after their hiking cycle. This will all depend on the resilience of the economy after tightening policy while facing higher energy costs. In the worst outcome, central banks might have to cut aggressively into accommodative territory to mitigate recession risks. Such a scenario helps explain why the belly of the curve can outperform in the current environment.