Dollar slipping again
US longer-dated bond yields are higher, US stocks lower and the dollar weaker amid the fallout from the US credit rating downgrade and related concerns about Trump’s “One Big Beautiful (Tax) Bill”, currently moving through Congress, which will add to the country’s deficits and debt over the coming years. The dollar has fallen to around $1.1330 and $1.3440 versus the euro and sterling respectively, while the pound has nudged up to around £0.8425 against the euro (from earlier lows close to £0.8450) following the release of firmer than expected UK inflation data a short while ago.
Government bond yields are a touch higher this morning on the back of reports of a potential Israeli attack on Iran’s nuclear facilities, which has also contributed to an increase in oil prices (Brent crude is up almost a dollar to just over $66 p/b). US 10- and 30-year yields rose by 5bps and 7bps respectively yesterday, with 30-year yields now back at 5% and close to the highs they reached at the start of the week following the Moody’s rating downgrade. In equity markets, the S&P 500 in the US shed almost 0.5% while European stocks added around 0.5%, though the latter have opened in negative territory this morning.
In the UK, the annual rate of headline CPI inflation reaccelerated to 3.5% in April from 2.6% in March, a slightly sharper increase than the consensus forecast but broadly as expected by the Bank of England. Core inflation (excluding food and energy prices) rose to 3.8% from 3.4%, while services inflation jumped to 5.4% from 4.7%. The rise in inflation last month reflected a number of regulated price increases, including electricity and gas, water charges and vehicle excise duty. Moreover, there was a 27.5% increase in airfares in April (from March), the second highest monthly rise for an April since records began, which contributed significantly to the jump in services inflation.
Fed member Musalem says “tariffs are likely to dampen economic activity and lead to some further softening of the labour market, even after the de-escalation (between the US and China) of May 12.” He also says the central bank “must maintain the public’s confidence about keeping up the fight against inflation” (which is likely to increase as a result of tariffs), indicating he supports leaving interest rates on hold for now.
It is extremely quiet for the rest of the day in terms of economic data with little or nothing of note due. On the central bank front, a number of ECB members are scheduled to speak over the course of the day.