Muzinich weekly market comment: central banks, status quo
Insight
March 2, 2026
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For context, the below was written before the events in the Middle East unfolded on Saturday 28th February and therefore does not factor in the events or impacts on markets since then. A further update on the US-Israel strikes on Iran and potential market impacts will be provided in a separate note.
US markets
The US Supreme Court's decision to strike down the use of the International Emergency Economic Powers Act (IEEPA)[1] as the legal basis for tariff imposition created remarkably little fanfare in financial markets last week. This is partially due to fact that the legal challenge has been building for months, giving markets ample time to anticipate the outcome and price in the possibility of a ruling against the administration.
Additionally, markets were largely aware of the available alternative legislation that had been prepared. The net result is that the average effective tariff rate now sits modestly below pre-ruling levels, a development that market participants have broadly welcomed.[2] Furthermore, most trade partners that reached agreements over the past several months seem to expect greater stability in tariff structures going forward, with the prospect of temperamental use of tariff escalations less probable now that the IEEPA is off the table.
We believe the situation still merits monitoring, although perhaps with less urgency. The new tariff regime appears more favourable to countries that bore the brunt of the “Liberation Day” announcements, and with mid-term elections now moving firmly into focus, the political calculus of pushing tariff rates materially higher – and risking the domestic price pressures that would follow –appears increasingly unfavourable.
US equity market volatility also seems to have come down over the last week. However, sector rotation away from technology and technology services in favour of more traditional assets has continued, contributing to elevated dispersion across sectors in the equity markets.[3] Credit markets have not been immune to the rotation, but with significantly more muted volatility; the fall in yields has helped to maintain positive total returns month-to-date, while sharp moves driven by negative valuations were much more painful for equity markets.
Nvidia's results last week offered just one illustration of some of the fault lines running through equity markets. The company reported record Q4 revenue of US$68.1 billion – up approximately 73% year-over-year (YoY) and ahead of consensus estimates – yet the stock fell roughly 4-5% the following session as investors questioned whether the extraordinary pace of AI capital expenditure can be sustained at the scale that Nvidia's growth trajectory implies.[4] The "beat and fade" pattern appears emblematic of the broader pressure bearing down on the Magnificent 7 and SaaS technology names more broadly, with Microsoft and Amazon significantly down year-to-date.[5]
Away from the technology sector, a different picture emerges. US small-caps and international developed equities have gained year-to-date with continued momentum. Value sectors (e.g., materials, energy and utilities) have outperformed the broader S&P 500, while more factor-based and defensive strategies have quietly thrived. Real economy stalwarts have attracted renewed interest as capital appears to be rotating away from US technology toward more cyclical, internationally diversified exposures.
While the AI disruptive theme is unlikely to abate anytime soon, the indiscriminate selling earlier this month seems to have increased dispersion, creating some selection in credit opportunities in what were more expensively valued markets at the start of the year. The leveraged loan market also seems to have stabilized after the early February selloff, assisted by a lack of supply as many refinancing operations were suspended and prices now appear to have found their footing.
Last week regional Fed indices in the US came in solid with jobless claims data confirming the stabilization of the labour market. Continuing claims fell to 1.83 million (from a high of 1.93 million in late October 2025), while weekly initial claims edged up modestly to 212K – remaining close to the lows of the post-shutdown period.[6]
On the geopolitical front, Iran-US negotiations continue to grow more complex as the US political administration’s push to fold ballistic missile capabilities into nuclear discussions seems to be meeting resistance from Iran, while the build-up of US military assets in the region appears intended to provide leverage to the American position.[7] Reports that Iran is simultaneously hardening its retaliatory doctrine in the event of a surprise strike added an additional layer of uncertainty. Oil prices have sharply risen approximately 15% year-to-date, reflecting both the geopolitical premium and the risk of supply disruption should a regional conflict materialize. This has not prevented the bond market from performing well, with lower nominal long yields over the past couple of weeks.
Beyond US markets
In Europe, the macroeconomic picture has been accumulating positive signs. The IFO index rose earlier last week, consistent with the improvement in the German PMI over the past two months.[8] While the European Commission's business confidence index edged modestly lower in February, the average across the first two months of 2026 sits 1.8 points above December 2025's reading (which was the strongest level seen in 2025).[9] Most of February's retracement came from France, which sharply corrected the positive surprise in January.
Consumer confidence in Europe also ticked up slightly in February.[10] We have highlighted for some time that real income in the Euro area has increased faster than real consumption, indicating a meaningful reservoir of untapped demand. A shift in saving behaviour could prove a significant tailwind for consumption in 2026, and consumer sentiment is an important leading indicator of whether that shift is beginning. While we welcome the February improvement, it has not yet changed the consumption profile for 1Q 2026 expectations for growth. However, given solid capital expenditure, decent private consumption, and a modest positive contribution from net exports, we have slightly revised our 1Q 2026 GDP forecast upward to 0.3% quarter-over-quarter.
On the European inflation front, January's final reading was on the soft side, with core inflation slipping to 2.2% YoY. Data shows that goods inflation slowed from 0.7% in December 2025 to 0.4% in January 2026, while services inflation eased from 3.40% to 3.20% for the same period. [11] With wage moderation expected in 2026, we believe headline inflation looks poised to fall comfortably below 2% in the coming months, while core inflation converges towards 2%.
Conclusions: A probable status quo
None of this is likely to shift the European Central Bank’s (ECB's) posture in the near term; the current 2% policy rate is viewed as appropriate, with the deviation of headline inflation unlikely to change this position.[12] The improbability of a reassessment is primarily due to the potential for any serious escalation with Iran (which could push oil prices higher and offset the base effect on headline inflation), and because further deceleration in services inflation is already priced into current policy rates and would need to be first be delivered to have any effect.
Similarly, the Fed also seems likely to remain status quo. With the Federal Open Market Committee (FOMC) meeting still a few weeks away, Fed speakers have been active in expressing their views in advance, with seemingly high odds for no change in policy as there have been few major developments in the labour market, inflation sits persistently above target, and tariff uncertainty lingers. Some FOMC voting members have expressed that cutting rates before inflation reaches target – in the context of a stable labour market - could send the wrong signal.[13] The March meeting will bring a new Summary of Economic Projections (SEP) delivery and an updated dot plot; the degree of dispersion in those projections should be telling, particularly ahead of the upcoming change in FOMC leadership.
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Past performance is not a reliable indicator of current or future results.
References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account.
This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of February 27, 2026, and may change without notice. All data figures are from Bloomberg, as of February 27, 2026, unless otherwise stated.
References
[1] Peterson Institute for International Economics, as of 23rd February 2026. “What the Supreme Court’s tariff ruling changes, and what it doesn’t”
[2] Deutsche Bank Research, “Tariffs post IEEPA,” February 23, 2026
[3] MarketWatch as of 26th February 2026. The S&P 500 is caught in an extremely narrow trading range. What’s happening beneath the surface could decide where the index goes next.”
[4] Associated Press, as of 26th February 2026. Nvidia delivers another quarter of stellar growth amid growing concern over AI economy.
[5] Financial Times, as of 7th February 2026. “Chart of the week: A diverging magnificent seven.”
[6] Associated Press, as of 26th February 2026. “US fillings for jobless aid rise modestly to 212,000 as layoffs remain at historically healthy levels.”
[7] Washington Post, as of 26th February 2026. “US, Iran complete round of talks as Trump weighs diplomacy against strikes.”
[8] Ifo Institute for February 2026. “Ifo Business Climate Index Increased”
[9] Joint Harmonised EU Programme of Business and Consumer Surveys, as of 26th February 2026.
[10] Trading Economics, Euro Area Consumer Confidence, as of 19th February 2026.
[11] Eurostat/Macrobond, as of February 2026
[12] European Central Bank, Economic Bulletin Issue 1, 2026.
[13] Reuters, as of 24th February 2026. “Two Fed officials do not see imminent need to change monetary policy.”
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