Markets on the back foot

A flare-up of hostilities between the US and Iran, related to control of the Strait of Hormuz, sent oil prices higher yesterday, contributing to a rise in bond yields and a fall in equity markets at the start of the week. The dollar also advanced albeit its gains were modest. The euro and sterling are trading at around $1.1685 and $1.3535 against the US currency this morning, down from last week’s closing levels of about $1.1725 and $1.3580 respectively, while EURGBP is little changed at £0.8635. For the remainder of the week, developments in the Middle East will obviously continue to command attention, while local elections in England on Thursday will be a particular focus for UK markets. Economic-data wise, the main release is the non-farm payrolls report in the US on Friday.

Government bond yields headed north, extending last week’s increase. The short-end led  the way with US and German 2-year yields rising by 8-9bps, while 10-year yields were about 5-7bps higher on the day. In equity markets, European stocks shed between 1% and 2%, with sentiment probably not helped by Trump’s announcement that he would impose a 25% tariff on car imports from the EU, while US stocks fared relatively better albeit down 0.5% to 1% at the close.

ECB member Kazimir says “it is becoming increasingly likely that we must prepare for a prolonged period of broad-based price increases” in the euro zone, adding that “on this basis, policy tightening in June is all but inevitable.” The market is on the same page with a 25bps increase in the deposit rate almost fully priced for the June meeting, and some 80bps of hikes in total expected for this year.

Fed’s Kashkari says the central bank ‘should offer a policy outlook that signals that the next (interest) rate change could be either a cut or a hike, depending on how the economy evolves’. He says he doesn’t believe ‘it is appropriate’ for the Fed to have an easing bias at this time, given ‘recent economic and geopolitical developments and the high level of uncertainty about the outlook’.

For the week ahead, as noted, the main economic release is Friday’s non-farm payrolls report for April in the US. The consensus expects the economy to have added 65k jobs last month, following a 178k gain in March, with the unemployment rate expected to have remained at 4.3%. Data due today include the ISM services index, job openings, and new home sales, all in the US. A number of ECB and Fed members are scheduled to speak over the course of the week.