A one-pager!
Hopes for a peace deal between the US and Iran – amid a report that the two sides “were closing in on a one-page memorandum of understanding to end the war” – sent oil prices and bond yields lower and stocks higher yesterday. The reaction in FX markets was relatively muted though, with the dollar falling initially before recovering ground. Hence, having traded up to intra-day highs of about $1.18 and $1.3650 against the US currency, the euro and sterling are back down at $1.1750 and $1.36 this morning (little changed from yesterday morning’s levels), leaving EURGBP marginally firmer at £0.8640. Meanwhile, local and devolved elections in England, Scotland and Wales will occupy UK markets for the remainder of this week (and possibly beyond depending on the outcome). Labour is certain to suffer heavy losses, that much seems clear, so for UK markets (and bonds and sterling in particular), it will be a case of how heavy are the losses and are there any immediate consequences for Keir Starmer’s leadership.
Government bonds rallied as oil prices fell and expectations for central bank rate hikes were pared back. The short-end led the way with UK and German 2-yields falling by around 14bps and 10bps respectively and equivalent US yields around 7bps lower on the day. The market is now pricing in a bit more than 50bps of hikes from the ECB and Bank of England this year, down from circa 75bps prior to yesterday, and sees (largely) flat Fed rates over the remainder of the year. In equity markets, both European and US stocks rallied strongly, chalking up gains of around 3% and 1.5% respectively.
The latest ADP private employment report in the US came in a touch shy of expectations but still showed job gains of almost 110k in April, up from around 60k in April. Over the three months to April, employment rose by an average of 79k a month, accelerating from +41k a month over the three months to January. Meanwhile, Fed member Musalem says that, while “we have risks both on the employment side and on the inflation side, in my understanding, the risks have been shifting towards more risk on the inflation side than the employment side.”
Looking to the day ahead, economic data due include retail sales for March in the Euro area; the construction PMI (April) in the UK; and productivity and costs (Q1) and weekly jobless claims in the US. The New York Fed releases its latest survey of household inflation expectations, while a number of ECB/BoE/Fed members are scheduled to speak over the course of the day.