Market Commentary

Oil prices fell and the dollar weakened after reports emerged that the US and Iran had agreed a 60-day extension of the current ceasefire, during which time there would be “unrestricted” passage through the Strait of Hormuz while negotiations on a permanent peace deal continue, though it seems Trump has yet to give this his ‘seal of approval’. Brent crude oil prices are at a circa 6-week low of around $92.5 per barrel, while the euro and sterling are trading at about $1.1650 and $1.3430 against the dollar respectively, off lows early yesterday of around $1.1590 and $1.3370. EURGBP continues to nudge very gradually higher, now at about £0.8670.

Yesterdays Events

Government bond yields ended lower on the day, falling by 3-6bps across the curve in the main markets. In equity markets, European stocks rallied off their lows but still ended in negative territory, while US stocks more than reversed early losses to close in the black for the day, with the S&P 500 setting a new all-time high in the process.

The minutes of the ECB’s end-April monetary policy meeting noted that “looking through” the energy price shock “was not appropriate”, and that the “primary focus” was now on “the most appropriate timing for a rate increase.” Indeed, a number of members said that they “would not have opposed raising rates at the current meeting had this been on the table”. It looks very much like a rate hike will be on the table at the June meeting though, with the market almost fully priced for a 25bps increase in the deposit rate to 2.25%.

PCE inflation data in the US were in line with expectations. Headline inflation rose to 3.8% in April (from 3.5% in March) mainly due to a further increase in energy price inflation, though core inflation  – which excludes energy and food prices – nudged up to 3.3% (from 3.2%). The increase in the core rate was due to an uptick in housing inflation (to 3.2%), as core services ex housing inflation (3.5%) and core goods inflation (2.8%) were both unchanged from March.

The Day Ahead

For today, economic data already released a short while ago showed inflation in France and Spain rose further in May according to the ‘flash’ readings, while equivalent data for Germany, Italy and Ireland are published late this morning/afternoon. There are a number of central bank members scheduled to speak over the course of the day, including Bank of England Governor, Andrew Bailey.

Market Commentary

News of a fresh round of US strikes on Iran overnight – which a US official described as “measured, purely defensive, and intended to maintain the ceasefire” – is weighing a little on markets. Brent crude oil prices are up around $3 to almost $97 per barrel, while US bond yields were higher and Asian stocks lower in overnight trading. The dollar is also a touch firmer, trading at around $1.1615 and $1.34 versus the euro and sterling respectively this morning. The pound is little changed against the euro from yesterday’s close of £0.8660, though it has been gradually weakening over the course of this week amid an easing of Bank of England rate hike expectations. Inflation data due in the US later today should command some attention, with a further increase in headline inflation expected on the back of higher energy prices.

Yesterdays Events

US bond yields edged higher overnight, increasing by around 3bps across the curve, having closed marginally lower yesterday, while German and UK yields are following suit this morning. As for stocks, most Asian markets were in the red, with Japan’s Nikkei index off around half a percent or so. European indices are down about 0.3% at the start of play this morning, while US stocks are set to open lower later today according to the futures market.

Fed Governor Cook says she believes that “the right course of (monetary policy) action is to hold (interest) rates steady.” She expects “disinflation (to) resume in upcoming months” as the impact of tariffs and higher energy prices run their course, but says she is “prepared to raise rates if the expected disinflation does not appear in a timely manner.” For its part, the market is currently pricing in a full 25bps hike in rates by March next year.

In its latest Financial Stability Review, the ECB says “the current energy supply shock poses upside risks to inflation and downside risks to economic growth” and warns that “prolonged geopolitical stress…could test financial market sentiment,” leading to  “increased market volatility and (rising) financing costs in an environment of weaker economic growth.”

The Day Ahead

Today’s PCE inflation data in the US are expected to show headline inflation rose further to 3.8% in April (from 3.5% in March) according to the consensus forecast, while core inflation is expected to have ticked up to 3.3% (from 3.2%), both well away from the Fed’s 2% target. Other US data include the regular weekly jobless claims, personal incomes & spending (April), durable goods orders (April), and a second estimate of GDP growth in Q1 2026. Elsewhere, the European Commission publishes its latest Economic Sentiment Indicator for the EU/Euro area. The ECB releases the minutes of its April monetary policy meeting.

Market Commentary

While oil prices rose to just over $100 per barrel at one stage during yesterday’s session  following renewed US strikes on Iran, the price action in markets was fairly muted suggesting they still expect some kind of peace deal/agreement to be reached between the two sides relatively soon. In FX, the euro is marginally firmer versus the dollar at around $1.1645, while sterling is a touch softer against the US currency at about $1.3450. The pound is also a little weaker against the euro, falling back to just over £0.8650.

Yesterdays Events

US and UK government bond yields edged down (from Friday’s closing levels) as trading resumed following the long-weekend, while German yields were slightly higher on the day, reversing a small portion of the quite sharp fall seen on Monday. In equity markets, European stocks gave up some of Monday’s gains, shedding around 1%, while the S&P 500 rose by just over half a percent to close at a new all-time high.

The ECB’s Chief Economist, Philip Lane says “a further upward adjustment to the (Euro area) inflation forecast” is likely in its updated macroeconomic projections in June, while also indicating that some “limited” monetary policy response will be required. He notes that the Bank’s surveys “suggest many firms expect that they will have to raise prices,” adding that “if this develops from an energy shock into a broader inflation problem, that would be a major issue.” The market has now almost fully priced in a 25bps increase in the deposit rate at next month’s meeting.

Consumer confidence in the US dipped in May according to the Conference Board’s indicator, having surprisingly risen in both March and April, “as the inflationary impacts of the war in the Middle East intensified (and) consumer appraisals of current economic conditions and the current labour market were moderately less positive compared to last month.” While consumer sentiment has been running at relatively subdued levels recently, consumer spending has been holding up relatively well, increasing in real terms by 2.0% year-on-year in March according to the latest available data.

The Day Ahead

Looking to the day ahead, it is extremely quiet on the economic data front with the ADP weekly employment report in the US the only release of any note. There are a few central bank members (from the Fed/ECB/BoE) scheduled to speak over the course of the day, while the ECB publishes its latest Financial Stability Review.

Market Commentary

Hopes for a US-Iran peace agreement triggered a rally in European bonds and stocks yesterday (US and UK markets were both closed for a public holiday), but reports of US strikes on Iran overnight is muddying the waters regarding a deal and is souring the mood in markets a little this morning as oil prices move up off  yesterday’s lows. In FX, the dollar is largely holding its own, supported by a recent rise in relative US bond yields. EURUSD and GBPUSD are both essentially unchanged from yesterday morning’s levels, trading at around $1.1630 and $1.3470 respectively, while EURGBP is  marginally firmer at £0.8635.

Yesterdays Events

ECB rate expectations eased as the market moved back to pricing in just over 50bps of hikes for the remainder of this year, with a circa 90% chance of a 25bps increase at next month’s monetary policy meeting (June 11th). German bonds rallied strongly, led by the front end of the curve, with 2-year yields falling by around 12bps and 10- and 30-year yields around 8-9bps lower on the day. European stocks also rallied strongly, gaining around 2%, though they are opening a touch softer this morning (off around 0.3%).

ECB Governing Council member Schnabel says the central bank should hike interest rates in June. She says that, “given the size and the persistence of the current (energy price) shock, looking through is no longer an option in my view (hence) I think a rate hike in June will be needed.” She also adds that “even if the war ended today, a lot of damage has already been done to energy infrastructure and global supply chains, so even then, I believe that a monetary policy reaction would be needed.”

The Day Ahead

For the day ahead, economic data scheduled for release include the Conference Board’s consumer confidence indicator for May, house prices (March) and the ADP weekly employment report in the US, and the CBI’s latest retail sales survey (May) in the UK.

Market Commentary

A potential US-Iran peace deal, amid ongoing negotiations, is driving markets at the start of the week, though trading volumes may be subdued today with the US and UK both out on public holiday. Brent crude oil prices are down around $5 from Friday’s closing levels to under $100 per barrel, Asian equity markets posted solid gains overnight, and European stocks have opened higher this morning (+1%). The dollar – which was little changed overall last week – is on the back foot, albeit modestly so, down about half a cent against both the euro and sterling to around $1.1640 and $1.3485 respectively. EURGBP opens little changed from Friday’s close at £0.8630. For the week ahead, it is relatively quiet on the economic data front, so the focus will be on developments related to the Middle East.

Yesterdays Events

German government bond yields posted sizeable declines last week, of the order of 10-15bps across the curve, and they are another 4-7bps lower at the open this morning on optimism for a US-Iran peace deal. UK bonds outperformed strongly on the week, helped by softer than expected (UK) inflation and labour market data, with yields declining by 17-27bps. US government bonds had a decidedly mixed week, with 2-year yields increasing by around 5bps amid a firming of Fed rate hike expectations but 10- and 30-year yields falling by 3-5bps. In equity markets, European stocks added another 1% or so on Friday to round off a positive week (+3%), while the S&P 500 gained around 0.4% on the day and just under 1% on the week.

Fed Governor Waller says that,  while he still has “concerns about the strength of the labour market, I have become more concerned that higher energy prices may have a lasting effect on inflation,” hence he  would support removing the “easing bias” language in “our monetary policy statement to make it clear that a rate cut is no more likely in the future than a rate increase.”

The Day Ahead

For the week ahead, as mentioned, the economic data calendar is relatively light with the Economic Sentiment Indicator for May in the Euro area on Thursday, and consumer confidence (May) and PCE inflation (April) in the US on Tuesday and Thursday respectively, the main releases of note. There are a large number of ECB, Fed and Bank of England members scheduled to speak over the course of the week.

Market Commentary

The euro and sterling are not much changed from yesterday morning’s levels, though off their intra-day lows of about $1.1575 and $1.3390 respectively, trading at around $1.1610 and $1.3425 this morning. Similarly, EURGBP is largely unchanged as it continues to hover in and around the £0.8650 area. Oil prices fell late yesterday (to lows of around $102 p/b in the case of Brent) after US Secretary of State Marco Rubio said there are “some good signs that a deal to end the war with Iran could be in sight.” This helped push US bond yields lower and US stocks higher in to the New York close, which is having positive knock-on effects on European markets this morning.

Yesterdays Events

US government 10-year bond yields finished a couple of basis points lower on the day, reversing an earlier increase, while equivalent German and UK yields are edging lower at the start of play this morning, down around 3-5bps.  In equity markets, the S&P 500 managed to end marginally in the black (+0.2%), having been off more than half a percent at one stage, while  European stocks have opened well in positive territory today (+0.9%).

The fall-out from the war in Iran weighed on the Euro area and UK economies in May judging by the flash PMI surveys, with the headline indices falling well below the key 50 level (to 47.5 and 48.5 respectively) signalling a contraction in activity in the month, led mainly by weakness in services. Not surprisingly, the surveys also report continuing upward pressure on input costs and selling prices. Separately, UK retail sales data for April released a short while ago were weaker than expected, with volumes falling by almost 1.5% on the month to leave them flat in year-on-year terms.

The European Commission has lowered its forecast for Euro area GDP growth this year to 0.9%, from 1.2% previously, largely on account of the impact of the conflict in the Middle East, though it does expect growth to pick up to 1.2% in 2027. Inflation is now forecast to average 3% this year, revised up from 1.9%, but is seen falling back to 2.3% (close to the ECB’s 2% target) next year.

The Days Ahead

It is a quiet enough end to the week in terms of economic data, with the ECB’s Negotiated Wages Indicator for Q1 2026, the ifo Business Climate Index (May) in Germany, and a final reading for US consumer confidence in May the only releases of note scheduled for the day.  A number of ECB members, including Christine Lagarde, and Fed Governor Christopher Waller, are due to speak over the course of the day.

Market Commentary

A drop in oil prices – Brent crude is down at around $106 per barrel – on the back of reports that a US-Iran deal may be in the offing contributed to a decline in bond yields, reversing Tuesday’s rise in yields, and a decent rally in stocks. The “risk on” mood in markets weighed on the dollar though its losses were very modest. EURUSD and GBPUSD are trading at about $1.1625 and $1.3435 respectively this morning, while EURGBP is hovering just below £0.8650, now back at the levels that prevailed immediately prior to the recent elections in the UK.

Yesterdays Events

UK government bonds outperformed, helped additionally by softer than expected UK inflation data for April, with yields falling by almost 15bps across the curve (10-year yields moving back below 5% in the process), while German and US yields posted sizeable declines of the order of 8-12bps. In equity markets, European stocks outperformed, chalking up gains of 1.5% to 2.0%, while the S&P 500 closed about 1% higher on the day.

Bank of England rate hike expectations eased after its Governor, Andrew Bailey, noted that “effectively we’ve tightened policy because we removed the expectation of a (rate) cut,” which has contributed to a sharp rise in market interest rates since the war in Iran commenced at the end of February. He added that this gives the central time to further “assess” the fall-out from the war, noting that “we’ve got a somewhat softening picture for growth, we’ve got a somewhat softening picture for the labour market.” About 50bps of hikes by year-end is now priced in, down from over 60bps earlier in the week.

Reuters yesterday reported that the case for an ECB rate hike in June is “nearly sealed”, but the central bank is likely to be “noncommittal about any further move” beyond June as it seeks to “temper bets for a quick follow-up step in July”, quoting four central bank sources. Market rate expectations eased with about 65bps of hikes now priced for this year, down from around 75bps.

The Day Ahead

Looking to the day ahead, flash PMIs for May are published in the Euro area, US and UK. The regular weekly jobless claims and housing starts are due in the US, while consumer confidence, labour costs and construction output are scheduled in the Euro area. The European Commission publishes its Spring Economic Forecasts.

Market Commentary

Bond markets sold off yesterday, led by US Treasuries, with yields rising notably amid still elevated oil prices, concerns about inflation, and a further hardening of central bank rate hike expectations. Higher relative US yields provided some modest support to the dollar. The euro dipped below $1.16 for a time against the US currency (from Monday’s close of just over $1.1650) and is hovering around this level this morning. Sterling has held up somewhat better against the dollar, remaining in and around the $1.34 level, and continues to claw back ground against the euro, currently trading at around £0.8660.

Yesterdays Events

US government bond yields rose by around 6-8bps across the curve, with 30-year yields reaching their highest level since 2007, while UK and German yields were 3-5bps higher on the day. UK yields are a good bit lower at the start of play this morning though, following softer than expected inflation data for April released a short while ago. Equity markets struggled in the face of higher bond yields. US stocks underperformed, with the S&P 500 down around 0.7% at the close.

CPI inflation in the UK fell by more than expected last month coming in at 2.8%, versus the consensus forecast of 3% and down from 3.3% in March. A reduction in domestic energy bills, announced before the war in Iran commenced, and a decline in food price inflation contributed to the fall in headline inflation, while core inflation (which excludes energy and food prices) fell to 2.5% from 3.1%, driven by a sharp decline in services inflation (to 3.2% from 4.5%), which reflected a number of factors including  lower airfares and package holiday costs.  The fall in inflation in April is likely to be fleeting though, with the effects of the Iran war expected to push the headline rate up again in the coming months (albeit now from a lower starting point than expected).

Fed member Paulson says the current stance of monetary policy “is mildly restrictive and that restrictiveness is helping to keep inflation pressures in check while the labour market remains stable,” adding that “keeping rates steady allows us to assess how the economy is evolving and the risks to both price stability and the labour market.”

The Day Ahead

For the day ahead, it is very quiet on the economic data front with a final estimate of Euro area inflation in April the only release of note (the flash estimate showed headline inflation rose further to 3% last month), while the Fed publishes the minutes of last month’s monetary policy meeting.

Market Commentary

It was a relatively quiet start to the week in financial markets. In FX, sterling recovered some ground after been under pressure for much of last week, moving back up to around $1.34 against the dollar and edging back below £0.87 against the euro. The single currency was little changed against the dollar, remaining near its recent lows at just under $1.1650. Meanwhile, Donald Trump has said he is pausing a “scheduled” attack on Iran for a few days to let allow negotiations on a “deal” to continue. Oil prices are little changed this morning with Brent crude still hovering around $110 p/b.

Yesterdays Events

UK government bonds outperformed yesterday with yields falling by around 7-8bps across the curve. German yields edged down by 2-3bps, while US yields were slightly lower at the short-end but flat to very marginally higher further out the curve. The latest constellation of interest rate expectations has the market pricing in about 70bps and 55bps of hikes from the ECB and Bank of England this year respectively and a circa 60% chance of a 25bps rate increase from the Fed by year-end.  Meanwhile, in equity markets, European stocks finished in the black albeit off their best levels, gaining just shy of 0.5%, while the S&P 500 in the US ended flat on the day.

The unemployment rate in the UK edged up in the three months to March according to labour market data published a short while ago, to  5% from 4.9% in the three months to February, though this was still a touch lower than in the final three months of 2025 (5.2%). Wage inflation in the private sector eased further with the year-on-year increase in average weekly earnings falling to 3.0% in Q1 2026 from 3.4% in Q4 2025, which will be some source of comfort for the Bank of England amid the inflationary “shock” triggered by the conflict in the Middle East.

The Day Ahead

For the day ahead, there is not much more in the way of economic data scheduled with just the ADP weekly employment report in the US and the trade balance in the Euro area. A few central bank members (from the ECB, Fed, and Bank of England) are due to speak over the course of the day.

Market Commentary

Bond markets capitulated on Friday – with yields backing up sharply – at the end of a week that saw a renewed increase in oil prices, rising inflation in the US (consumer, producer and import price inflation all came in ahead of forecasts in April), and a hardening of central back rate hike expectations, notably in the case of the Fed with a 25bps increase in the policy rate now more than fully priced in by March of next year. In FX, the dollar advanced on the week, while sterling was underperformed amid the turmoil engulfing the Labour Party in the UK. The pound shed about 3 cents against the US currency and around a penny against the euro, kicking off this morning trading at around $1.3350 and £0.8715 respectively. The single currency fell by almost 1.5 cents on the week against the dollar, currently trading just below $1.1650. Meanwhile, Donald Trump has warned that the “clock is ticking” for Iran , which is weighing on markets generally this morning.

Yesterdays Events

Government bond yields rose very sharply on Friday led by the long-end of curves, with US and German 10-year yields increasing by 12-13bps and equivalent UK yields about 18bps higher on the day. Over the week, UK yields rose by 26bps, which was almost matched by a 23bps increase in US yields, while German yields  were around 17bps or so higher. Rising bond yields weighed on equity markets at the end of the week, with US and European stocks shedding around 1% and 1.5% respectively on Friday.

ECB member Stournaras says “a significant but temporary excess over the (2%) inflation target would mean a measured adjustment of monetary policy in a more restrictive direction in the near future, in order to limit the intensity of second-round (price) effects, without disproportionately affecting economic activity,” suggesting he favours an increase in interest rates at next month’s meeting.

The Day Ahead

For the week ahead, Finance Ministers and central bankers from the G7 meet today and tomorrow, while there’s a heavy schedule of UK economic data due including the Q1 2026 labour market report tomorrow (Tuesday), CPI and PPI inflation for April on Wednesday, and consumer confidence (May) and retail sales (April) on Friday. Meanwhile, flash PMIs for May are published in the main economies on Thursday, which will provide an update on how they are faring amid continuing high oil prices and the ongoing uncertainty resulting from the conflict in the Middle East.

Market Commentary

Sterling is a good bit lower following the latest political developments in the UK, which (in short) could see Andy Burnham, currently Mayor of Greater Manchester – and who has previously said Britain is too “in hock to the bond markets – challenge for the leadership of the Labour Party in the coming weeks. The pound has fallen by almost two cents against the dollar from late yesterday evening to trade at about $1.3370, and has shed more than half a penny to just north of £0.87 against the euro, its weakest level in more than a month. The single currency has also lost ground to the dollar – which is benefiting from a notable firming of Fed rate hike expectations – trading at around $1.1640 this morning.

Yesterdays Comments

UK government bond yields have spiked higher this morning on the back of political developments, increasing by around 9-11bps across the curve (and more than undoing a sizeable fall yesterday). US yields are also heading north, having closed flat to slighter higher yesterday, with the benchmark 10-year yield now above 4.5% for the first time since May last year, while German yields are following suit. In equity markets, Asian stocks were a good bit softer overnight and European indices have opened in the red this morning, while the US looks set to open lower later today too.

Fed member Schmid says he sees “continued inflation as the most pressing risk to the (US) economy, noting that while it has moderated significantly from its peak levels (of over 7% in 2022), “it is clear that it is still too high” (currently running at around 3.5%).

Bank of England Chief Economist Pill reiterates his call for an increase in interest rates, saying that “while we don’t want to rush into making very quick decisions, what we can’t do is just allow ourselves to drift off into the deep space of inflationary dynamics becoming uncontrolled,”

The Day Ahead

Looking to the day ahead, it is pretty quiet in terms of economic data with only industrial production and the Empire Manufacturing Survey due in the US.