Sterling slides

Sterling is a good bit lower following the latest political developments in the UK, which (in short) could see Andy Burnham, currently Mayor of Greater Manchester – and who has previously said Britain is too “in hock to the bond markets” – challenge for the leadership of the Labour Party in the coming weeks. The pound has fallen by almost two cents against the dollar from late yesterday evening to trade at about $1.3370, and has shed more than half a penny to just north of £0.87 against the euro, its weakest level in more than a month. The single currency has also lost ground to the dollar – which is benefiting from a notable firming of Fed rate hike expectations – trading at around $1.1640 this morning.

UK government bond yields have spiked higher this morning on the back of political developments, increasing by around 9-11bps across the curve (and more than undoing a sizeable fall yesterday). US yields are also heading north, having closed flat to slighter higher yesterday, with the benchmark 10-year yield now above 4.5% for the first time since May last year, while German yields are following suit. In equity markets, Asian stocks were a good bit softer overnight and European indices have opened in the red this morning, while the US looks set to open lower later today too.

Fed member Schmid says he sees “continued inflation as the most pressing risk to the (US) economy”, noting that while it has moderated significantly from its peak levels (of over 7% in 2022), “it is clear that it is still too high” (currently running at around 3.5%).

Bank of England Chief Economist Pill reiterates his call for an increase in interest rates, saying that “while we don’t want to rush into making very quick decisions, what we can’t do is just allow ourselves to drift off into the deep space of inflationary dynamics becoming uncontrolled,”

Looking to the day ahead, it is pretty quiet in terms of economic data with only industrial production and the Empire Manufacturing Survey due in the US.