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Nuclear program off the menu: The conflict in the Middle East remains in a tense stalemate with ongoing ceasefire negotiations in a fragile state. The U.S. rejected Iran’s initial ceasefire proposal earlier last week on the premise that Iran did not agree to give up their nuclear program, extending the naval blockade on the Strait of Hormuz. Iran submitted a revised proposal on Friday morning, which was met with U.S. scrutiny. President Donald Trump subsequently responded, stating that he was “not satisfied” with the proposal and promptly rejected the plan. Early this week, President Trump announced new initiatives for the U.S. to “guide” trapped ships through the embattled Strait of Hormuz waterway. However, Iran continues to threaten ships passing through the waterway without their cooperation – heightening tensions in the region. Though the indefinite ceasefire remains in place to allow both Iranian and U.S. diplomats to negotiate a solution to reopen the Strait, there has been little tangible progress reported thus far, giving markets low visibility into a timeline for a near-term resolution.

Most Fed dissents since 1992: Against the backdrop of elevated energy prices and geopolitical uncertainty, the Fed held interest rates steady at 3.50-3.75% last Wednesday in what was Jerome Powell’s final meeting as Chairman. The decision saw four dissenting votes, the most since 1992, reflecting mounting divisions over monetary policy framing amid inflation pressures exacerbated by the Iran conflict. Fed Governor Stephen Miran dissented in favor of easing monetary policy for the sixth consecutive time, while three Fed officials objected to the statement’s “easing bias” language. In discussing the future composition of the Fed, Chair Powell announced he will break from tradition by continuing to serve on the Fed’s Board of Governors beyond the expiration of his term as Chairman on May 15. This historically atypical decision was depicted by Powell as aimed at defending the institution’s political independence, specifically while DOJ investigations into the Federal Reserve have not been finalized. His decision means Kevin Warsh will presumably fill Stephen Miran’s seat once he is formally confirmed as Chairman. Meanwhile, Powell could remain as governor “for a period of time,” but no longer than January 2028, which would prevent a second vacancy on the Board. One day following the FOMC meeting, Q1 GDP rebounded slightly below estimates to 2.0% (Est. 2.3%, Prev. 0.5%), with the previous quarter reflecting a sluggish growth statistic due to the Federal government shutdown. March Core PCE arrived in line with market consensus at 0.3% monthly (Prev. 0.4%), also meeting the consensus forecast for annual Core PCE inflation at 3.2% YoY (Prev. 3.0%). While the economy has been “remarkably resilient,” as Fed Chair Powell characterized it in this press conference, the economic outlook remains clouded by geopolitical risk and persistent inflation, leaving the Fed in a holding pattern as it navigates a leadership transition with the path forward for monetary policy highly uncertain. Dallas Fed President Lorie Logan, one of the dissenters, said Friday, “…it could plausibly be appropriate for the FOMC’s next rate change to be either an increase or a cut.”

Treasuries pressured on Fed division: U.S. Treasury yields surged after the Fed’s policy meeting, driven by widening dissents among policymakers and persistent inflation pressures, exacerbated by rising oil prices tied to the conflict in the Middle East. In response to the FOMC decision, the policy-sensitive 2-year Treasury yield jumped 11 bps last Wednesday, marking the sharpest increase on a Fed decision day since 2022. Last Thursday’s economic data provided modest relief, with Q1 GDP arriving slightly below expectations and March Core PCE meeting estimates, pulling Treasury yields back from their weekly peaks. Despite the Thursday pullback, the 2-year Treasury still closed the week higher at 3.88%, while the benchmark 10-year Treasury yield finished higher at approximately 4.37%. These movements occurred as markets continued to monitor developments regarding the ongoing negotiations in Iran. The CME FedWatch Tool has now extended the timeline for the next potential Fed Funds Rate reduction to the end of 2027. Last week’s $183 billion Treasury auction cycle of 2-year, 5-year, and 7-year notes continued April’s trend of weak performance amid elevated volatility and uncertainty surrounding the Fed’s policy path.

GSEs outperform: As the month of April came to a close, there was an uptick in Agency CMBS activity last week. Weekly new issue Fannie Mae DUS/MBS accelerated to $900 million last week, above the $740 million 4-week moving average. Nearly half of the week’s volume came in 5/4.5 paper, with 7/6.5s and 10/9.5s each accounting for roughly a fifth of activity. Investor spreads across standard structures were relatively unchanged, to one basis point wider. Freddie Mac priced a $1.3 billion 10-year fixed K-deal transaction in the context of preliminary market guidance. Both GSEs reported Q1 2026 earnings this week, with Fannie Mae originating $17 billion (+44% vs Q1 2025) and Freddie Mac $13 billion (+25% vs Q1 2025) in new multifamily business, indicating continued lending appetite through ongoing market volatility. While appetite remains healthy relative to alternative credit products, some investors noted growing concerns surrounding stubborn inflation, and the “higher-for-longer” sentiment could begin to add pressure on credit spreads. Investment-grade issuance this week surged to 2.5x dealer forecasts, driven by heavy AI-related debt offerings from major tech companies following first-quarter earnings. Nonetheless, the CDX Investment-Grade 5-Year and the Bloomberg Single-A Industrials investment-grade credit spreads were flat to two bps wider over the week.

The week ahead: A host of Federal Reserve speakers will take center stage this week, providing critical insight into last week’s contentious policy decision and their views on the monetary policy path ahead. Kevin Warsh is poised to inherit a committee that is leaning increasingly less dovish as energy-driven inflation spreads across the economy. Commentary from Fed officials regarding the policy outlook will be closely scrutinized, particularly as markets have extended the timeline for the next potential rate cut.

The Middle East conflict remains the critical wildcard for both inflation expectations and Fed policy decisions. Iran’s supreme leader vowed last Thursday to protect the Islamic Republic’s nuclear and missile capabilities, which President Trump has sought to curtail through airstrikes. Brent crude oil briefly surged past $126 per barrel as stalled US-Iran talks raised doubts over a near-term resolution. Any updates on ceasefire negotiations or military escalation will be critical for energy markets and the Fed’s inflation outlook. While the April Unemployment Rate (Est. 4.3%) and Nonfarm Payroll data (Est. 63K jobs added) will be monitored when released on Friday, these lagging labor indicators are expected to take a back seat to forward-looking policy and geopolitical developments. While these are lagging indicators, last week’s jobless claims data showed further signs of labor market stabilization, with initial claims falling to 189K (the lowest since 1969) and continuing claims dropping to 1.785 billion versus 1.906 billion last year, suggesting the labor market remains somewhat resilient despite geopolitical headwinds.

Economic Calendar: (Week of 05.04.2026 – 05.08.2026):

05/05: Tuesday

• Apr Final: S&P Global U.S. Services PMI (Prev. 51.3)
• Apr: ISM Services Index (Est. 53.85, Prev. 54.0)
• Mar: JOLTS Jobs Openings (Est. 6756K, Prev. 6882K)

05/06: Wednesday

• S. Treasury Quarterly Refunding Announcement

05/07: Thursday

• Week of May 2: Initial Jobless Claims (Est. 205K, Prev. 189K)
• Week of Apr 25: Continuing Claims (Est. 1,785K, Prev. 1,785K)

05/08: Friday

• Apr: Change in Nonfarm Payrolls (Est. 63K, Prev. 178K)
• Apr: Unemployment Rate (Est. 4.3%, Prev. 4.3%)
• May Preliminary: U. of Mich. 1 Yr Inflation (Prev. 4.7%)
• May Preliminary: U. of Mich. Sentiment (Est. 49.3, Prev. 49.8)