Positive mood in markets for a change
A retreat in oil prices and some paring back of central bank rate hike expectations contributed to a fall in bond yields, a rebound in stocks, and a weaker dollar. Reported intervention by the Japanese authorities to support the yen also weighed on the dollar. The euro has strengthened to around $1.1740 against the US currency, from early morning lows yesterday of close to $1.1650. As is usually the case, sterling has benefited from the more positive mood in markets generally. It is trading just north of $1.36 against the dollar this morning, well off yesterday’s lows of around $1.3450, and at about £0.8620 against the single currency. The pound has threatened to break below the £0.86 level on a couple of occasions this year without managing to do so. It remains to be seen if it will be different this time round, but a continuing ‘risk on’ mood in markets in the near-term would help.
The ECB and Bank of England both left policy on hold yesterday, but both indicated they are inclined to raise interest rates in June to address upside risks to inflation (though this could still depend on developments in the Middle East conflict over the coming weeks). Markets still pared back expectations for rate hikes this year though, by around 10-15bps, which in turn contributed to a decline in bond yields, with UK and German 2-year yields around 10-12bps lower on the day. Equity markets, meanwhile, gained around 1%, the S&P 500 closing at a new all-time high in the process.
Euro area headline inflation rose for a third month running in April, picking up to 3% (as expected) from 2.6% in March, with the increase more than accounted for by higher energy inflation. Core inflation, which excludes energy and food prices, nudged down for a second month running, to 2.2% from 2.3%, with an increase in core goods inflation to 0.8% (from 0.5%) more than offset by a decline in services inflation to 3% (from 3.2%).
The US economy expanded by 0.5% quarter-on-quarter (2.7% year-on-year) in the first quarter of this year, according to the preliminary GDP estimate, picking up from 0.1% in the final quarter of 2025, when growth was dampened by the prolonged government shutdown. On the inflation front, headline PCE inflation accelerated to 3.5% in March from 2.8% in February, mainly reflecting rising energy inflation, while core inflation nudged up to 3.2% (from 3%) with both goods and services inflation picking up from February.
Looking to the day ahead, economic data due including the ISM manufacturing index for April in the US and mortgage approvals/lending for March in the UK. With public holidays across much of Europe, it may be relatively quiet in markets though.