The conflict in the Middle East is expected to result in higher inflation and slower global growth, says Kristalina Georgieva, managing director of the International Monetary Fund. The war has caused a 13% reduction in global oil supply, primarily due to Iran's blockage of the Strait of Hormuz. The IMF plans to downgrade its economic growth forecast and raise its inflation outlook, even if the war ends soon, Georgieva says.

US Federal Reserve Bank of Cleveland President Beth Hammack and Federal Reserve Bank of Chicago President Austan Goolsbee have expressed concerns about inflation, with Hammack noting that inflation has been above target for five years and has recently been stagnant. While Hammack views the labor market as stable, Goolsbee is more cautious, citing low hiring and firing rates amid ongoing uncertainty.

US mutual funds and exchange-traded funds are increasing their use of inflation swaps to hedge against rising consumer prices, reaching levels last seen during the post-pandemic surge.

The Bank of Japan has warned that rising oil prices and supply chain disruptions caused by the Middle East conflict could negatively affect Japan's economy. The BOJ's regional report highlights concerns from firms about increasing energy costs and potential disruptions in raw material supplies, although the impact has been limited so far. The BOJ's cautious stance contrasts with the more hawkish debate within its board, especially as the next policy meeting approaches.

US Treasury market activity remained muted at the start of the week, with yields holding small gains in thin trading due to European holidays and investor caution. The yield on two-year Treasuries held near 3.84%, while the 10-year yield hovered around 4.33%. Upcoming auctions of three-, 10-, and 30-year notes totaling $119 billion are in focus, particularly after lackluster demand in recent sales.

High-yield bonds have been sold off alongside other risky assets this year, but investors should not treat them the same as leveraged loans. High-yield bonds have a different sector composition, with more exposure to energy and basic industries, potentially making them more resilient to market disruptions. While default rates for high-yield bonds and leveraged loans have converged recently, JPMorgan Chase expects the default rate for leveraged loans to rise faster than for high-yield bonds in the coming years.

European Central Bank Governing Council member Yannis Stournaras says monetary policy in the eurozone will depend on the extent and duration of energy supply disruption from the Iran war. Stournaras says a temporary spike in energy prices would require limited monetary policy adjustment, but a persistent increase could lead to a tighter stance to manage inflation.

The US Commodity Futures Trading Commission has requested a 12% increase in its budget for fiscal 2027, to $410 million, amid a surge in prediction markets, which has led to the number of actively traded futures contracts more than doubling in the 12 months through Sept. 30, 2025. The CFTC has cited the popularity of event contracts on platforms as a reason for the increased oversight needs.

Financial leaders have raised concerns about the potential impact of the EU Capital Requirements Directive VI, set to take effect next year. The directive, which includes Article 21c, would significantly restrict non-EU banks from providing core banking services to EU clients from outside the bloc. The directive would force UK and US banks to increase their operations in the EU, potentially shifting assets and staff from the UK.

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