1. IMF takeaway – Outlook not as bad as feared but not as good as priced
Given the behaviour of financial markets in Trump 2.0, it is understandable that risk assets perform on a signal of caution from policymakers at a point where not much economic weakness has materialized. IMF revisions to global growth were relatively muted in the “reference forecast.” Several clients also expect Chinese growth upgrades in 2026, a break from recent years. Nevertheless, we fear that the market is becoming desensitized to the constant back and forth on the Strait. Investors want to look through the disruptions now, but the window for potential downside is now open (i.e. physical shortages more and more acute). Downside risks to the economy and upside risks to inflation targets could still be rising. US 10y yields trade +30 bps above the lows of late February. Compared to the UBS baseline before the Iran conflict, we now expect higher inflation prints in spring but US growth would continue to print around 2% qoq ar. We think that US 10y yields could still test levels above 4.25% (and we prefer to position for outperformance in the belly of the US curve). Euro area headline inflation should rise to 3% for multiple quarters in a row (see Figure 11) but at the expense of lower growth and we remain long 10y bunds.
2. IMF takeaway – Current supply shock points to wait-and-see
Central bank speeches at IMF meetings helped to reduce expectation of rate hikes. A week ago we wrote that central banks could help remove what looked to us like exaggerated expectations out of the market. Leading central bankers delivered on this, with some emphasizing that no energy crisis is alike and that the optimal response of a central bank will depend on the state of economy and labour market. ECB officials sounded less hawkish than a few weeks ago—more concerned about supply-chain disruption and growth headwinds, and perhaps quietly relieved that oil and gas prices have not risen further. We closed the April ECB receiver that we had opened right after the March ECB meeting. There is an active debate with clients on the likelihood of a June hike (17 bps of tightening is now priced for June).
3. IMF takeaway – Next Fed’s move still a cut but not in 2026
In contrast, we met very few clients who expected the Fed to cut in 2026 and many clients who thought the hit on the US economy from higher energy prices will not be as bad as feared. Higher tax refunds also helping US households to deal with the real increase in energy prices. UBS estimates that cumulative refund checks to households are $50 to $60 bn higher this year.In his speech “One transitory shock after another”, Governor Waller has also turned less dovish pointing to both the Iran conflict and labour market developments. We met few clients who expect Fed cuts in 2026 but we are positioned for more Fed easing between Sep ’26 and Sep ‘27. UBS expects the Fed to cut in Dec ’26 followed by two more rate cuts in 2027.We think that Kevin Warsh’s Fed Chair nomination hearing before the Senate Banking Committee may also remind investors that the views of a new Fed Chair will matter down the road.