Markets
UK gilts took a heavy blow on a toxic combination of political and fiscal uncertainty while a renewed oil price rise added further fuel to already lingering inflation risks. Prime minister Starmer for now resists growing pressure to leave office in the wake of last week’s historical election defeat. Some 90 Labour lawmakers by now have called on Starmer to resign. Unless at least 81 of them rally behind a single potential successor – automatically triggering a leadership contest – it is up to Starmer to decide. It’s mere perceived control over his own fate, though. Either he stays on as a lame duck bowing to backbencher demands or he eventually resigns. Acknowledging the risks, gilts sold off, pushing yields between 7.4 and 10.3 bps higher across the curve. The 10-yr (5.1%) and 30-yr (5.77%) closed at the highest level since 2008 and 1998 respectively. GBP lost ground but finished off the intraday lows. EUR/GBP traded just shy of 0.87 before paring gains to 0.867. European swap rates added 3.8-6.9 bps, slightly outperforming vs Bunds. Japanese yields continue their ascent, which remained largely below the radar lately even though several tenors are near, at or even above multidecade highs. US yields rose 3.8-5.3 bps with the 2-yr yield retesting the 4% barrier. April CPI numbers topped expectations and added to the intraday rise. The 3.8% headline print (from 3.3%) was not only supported by energy. Price rises were much broader. Services inflation in particular was striking, or as Fed Goolsbee called it: worrying. Even excluding a sharp shelter increase (0.6% m/m), the so-called supercore services gauge quickened to 3.4%, the highest since February 2025. We upgrade our in-house forecast for May to 4.2% for the headline and 2.9% for core. The US dollar strengthened to EUR/USD 1.1739. DXY bounced to north of 98. USD/JPY saw some intraday volatility during USTS Bessent’s visit to Japan. Some attributed it to authorities doing a rate check, the final stage before potential interventions. USD/JPY (157.63) quickly recovered from a drop to as low as 156.78.
There’s little inspiring on the economic agenda today. April US PPI’s are worth mentioning as a gauge for pipeline price pressures that may eventually show up in CPI. ECB’s Lagarde and chief economist Lane are scheduled to speak today, be it after European closing hours. We’ll be watching Lane for giving an update of a closely watched slide in a speech he gave April 14 and in which he plotted the oil forward curve in comparison with the ECB’s base and adverse scenario. Spoiler alert: it’ll have moved further towards the adverse one. Markets (ex. UK) in general may keep a cautious bias, sticking the sidelines going into the high-stakes meeting between the US and Chinese president from Thursday through Friday.
News & Views
Energy lobby groups Eurogas and the International Association of Oil & Gas Producers asked to maximize flexibility when it comes to refilling depleted natural gas inventories. Storage levels dropped below 30% for the first time since 2022 at the end of March/early April compared with an EU goal of reaching 90% ahead of the heating season (with 10 percentage point deviation). In their joint statement, Eurogas and IOGP call for flexibilities to be activated by the EC and member states as soon as possible, early in the storage season. “Initiatives such as demand aggregation or diversification approaches should remain voluntary in nature and must not distort wholesale price signals. Clear and credible price signals are indispensable to attract natural gas, and crude oil supplies in global markets, particularly in a tightening market characterized by intense competition for LNG cargoes, including by Asian buyers.” The timing of the statement coincides with an informal meeting of EU energy ministers later today.
The monthly Business Survey of the Banque de France showed economic activity growing more slowly in industry and construction and stagnating in market services. Industrial production remained relatively strong and even exceeded expectations. The outlook for May points to stagnation or declines in all sectors. Firms are still concerned about rising raw material prices and logistical disruptions. Due to strong competition, companies only partially pass these increases onto customers. Selling prices should continue to rise in industry and construction. In services, they are mainly seen in transport and logistics driven by higher diesel costs.
