Pound off its lows

Rising bond yields, weaker stocks, and a firmer dollar were the order of the day as oil prices headed further north (Brent crude now above $105 p/b). UK markets were additionally pressured by heightened political uncertainty as Prime Minister Starmer faced calls to step down amid a flurry of ministerial resignations, though he has dug his heels in and remains in situ for now at least. In FX, the pound fell to lows for the day of about $1.35 against the dollar and £0.87 against the euro (the middle of the very tight range of £0.86 to £0.88 that has prevailed this year to date) before recovering some ground, currently trading at about $1.3530 and £0.8660. The single currency continues to drift gradually lower against the dollar, trading at around $1.1720 this morning.

There has been some firming of rate hike expectations this week as oil prices have moved up again, with circa 10bps of tightening priced back in for the main central banks, in turn contributing to higher government bond yields. US and German yields rose by 4-7bps yesterday, while UK bonds underperformed, not surprisingly given the political backdrop, with yields about 8-10bps higher across the curve. In equity markets, European stocks were lower again, shedding another 1% or so, while the S&P 500 erased earlier losses to close only marginally lower on the day (-0.2%).

Both headline and core CPI inflation in the US came in a bit firmer than expected in April, rising to 3.8% and 2.8% respectively from 3.3% and 2.6% in March (and 2.4% and 2.5% in February). A further acceleration in energy price inflation (to almost 18%) and a pick-up in food price inflation (to 3.2% from 2.7% in March) contributed most to the increase in headline inflation, while the rise in core inflation was due to a second consecutive increase in core services inflation (to 3.3% from 3%), which more than offset a decline in core goods inflation (from 1.1% from 1.2%). In response to the data, Fed member Goolsbee said “we’ve got an inflation problem in this country and we’ve got to get it (inflation) back down.

ECB member Nagel says while he’s still holding out “some hope for a significant easing of tensions in the Middle East, we can’t ignore high energy prices,” adding that interest rate hikes are “becoming increasingly likely unless the inflation picture changes fundamentally.” Similarly, his ECB colleague Patsalides, notes that, “as things stand, they are pointing to an increase in interest rates.”

Looking to the day ahead, on the political front, Keir Starmer meets one of his main rivals, Wes Streeting, in Downing Street this morning for what are being described as “showdown talks”, while Trump begins his two-day visit to China. In terms of economic data, producer prices are due in the US and industrial production (March), employment (Q1) and GDP (Q1, second estimate) are scheduled in the Euro area. There are a number of ECB/Fed members due to speak over the course of the day.