Stocks rally, bond yields higher
The significant de-escalation of the ‘trade war’ between the US and China prompted a sizeable reaction in markets, with equities rallying strongly, bond yields rising quite sharply, and the dollar strengthening across the board. The latter rose to intra-day highs of around $1.1060 and $1.3140 against the euro and sterling respectively, but has since fallen back by about half a cent against both (to $1.11 and $1.32). The pound is trading at around £0.8420 against the euro this morning, slightly off yesterday’s best levels of £0.84
The Nasdaq led a rally in US equity markets, gaining almost 4.5%, with the S&P 500 up more than 3%, while European stocks added close to 2%. In government bond markets, US, German and UK yields were all higher, increasing by 10-12bps, as stocks rallied and rate cut expectations were pared back. About 50bps of cuts by year-end is now priced in for the Fed, ECB and Bank of England, some 10-15bps less than before yesterday’s ‘truce’ between the US and China.
Labour market data released in the UK a short while ago were a touch softer than expected. The number of payrolled employees fell again in April (-33k) according to Revenue data, while total employment on the Labour Force Survey (LFS) measure increased by 0.3% in the first quarter of the year. The LFS also showed an increase in the unemployment rate in Q1, to 4.5% from 4.4% in the final quarter of 2024, and an easing in the y-o-y rate of growth in both whole-economy and private sector regular earnings, to 5.6% (for both) from 5.9% and 6.2% in Q4.
In a speech in Dublin yesterday, Fed Governor Kugler said she expected growth in the US this year to be to slower than in 2024, noting that “trade policies…appear likely to generate significant economic effects even if tariffs stay close to the currently announced levels,” adding that “uncertainty associated with these tariffs has already generated effects on the economy.”
Looking to the day ahead, the main economic data release is the CPI report for April in the US, which will be scrutinised for any tariff-related impact on consumer prices. The consensus expects both the headline and core CPI to have increased by 0.3% last month, which would leave the annual rates of inflation unchanged from March at 2.4% and 2.8% respectively. Other data scheduled include the small business optimism index in the US also, and the ZEW investor confidence index for Germany and the Euro area.