Markets
The UK prime minister Keir Starmer is hanging by a thread. A colossal defeat at the regional and local elections last week increasingly looks to be the straw that will break the camel’s back. It is the latest of the multiple hits Starmer took when being in office, ranging from the Mandelson case over policy missteps and dramatic U-turns and near-constant infighting. A speech yesterday by Starmer, in which he also insisted not to leave, failed to persuade many Labour members of his ability to change the party’s fortunes. A formal leadership challenge is triggered when 81 Labour lawmakers (20% of the total) rally behind a single candidate. But fearing for a chaotic process, many MPs prefer Starmer to either quit himself or set out plans for departing. More than 70 of the 403 MPs, among which several senior ministers, have already called on him to do so. According to the Financial Times citing people close, he was weighing things ahead of a crucial cabinet meeting later today. Starmer’s looming exit causes market concern over the UK’s fiscal future when a potential new PM takes over. Gilts underperformed greatly vs global peers yesterday with the 30-yr yield rallying more than 9 bps. Monday’s close at 5.67% is to be compared with the 5.74% multidecade high seen exactly one week ago. Yields rose earlier on the curve too to the tune of 8-8.5 bps, supported by rising oil prices after president Trump dismissed the Iranian counterproposal as “a piece of garbage”. He later called the ceasefire as being on massive life support. Brent finished at $104 and is nearing $105 per barrel this morning. European rates joined the broader move higher with net daily changes varying between 2.7 and 5.5 bps (swap) in a bear flattener. US yields added 5.2-7 bps in a similar curve shift. While most focus is going to its currency lately, Japanese bonds are gradually eroding to their weakest levels in many decades. The 30-yr yield for example rises to 3.8% this morning, extending a bounce higher that started with the Iran war. Closing at that level would only leave January 20 (3.87%) stand in between new record highs. The 10-yr yield (2.55%) is setting a 29-year high as we speak. The yen did show some of the biggest swings on the FX market yesterday with USD/JPY recovering to 157.2 and building on that move this morning (157.7). About half of the intervention impact is being wiped out. Most other currency pairs closed little changed, including sterling – for all of the uncertainty that’s plaguing it.
S April CPI is on tap today. Our in-house headline nowcast stands at a consensus-matching 3.7%, which would mean a quickening from March’s 3.3%. We expect core CPI at 2.6%, the same as in March. For food, after flat monthly growth in March, we cautiously assume 0.2% m/m, implying 2.9% y/y. Energy could rise another 5.4% m/m given further increases in oil and gasoline prices. That would correspond to 19.4% y/y (up from 12.6% in March). We’re particularly interested in the market reaction in an upside surprise. Combined with a labour market in a stable shape, there’s room for US yields rise and the dollar to appreciate. The 2-yr yield is closing in on the 4% barrier.
Supply today includes a $42bn 10-yr US auction and a new syndicated deal in Belgium. The Kingdom intends to issue the last of 2026’s three benchmark deals. This one will have a 5-year maturity and comes after the country raised €8bn and €6bn with the 10-yr and 30-yr deals earlier this year.
News & Views
The British Retail Consortium retail sales monitor shows uncertainty hitting sales in April. UK total retail sales decreased by 3% Y/Y (from +3.6% Y/Y) and by 3.4% Y/Y (from +3.1% Y/Y) on a like-for-like basis. The CEO at BRC said that April’s sales fall was largely driven by the Easter shift, with food hit hardest (food sales -2.5% Y/Y from +6.8% Y/Y). Non-food sales decreased by 3.3% Y/Y (from +0.9% Y/Y). Taking March and April together, and comparing them with the same two-month period in 2025 (to account for the timing of Easter), UK total retail sales increased by 1.5% Y/Y. Weak consumer confidence also played a role in April as fears about the Middle East conflict driving up living costs led shoppers to rein in. Big-ticket purchases fell, with the recent recovery in furniture losing steam, and uncertainty around summer holidays hitting discretionary spend.
South Korean presidential policy chief Kim Yong-beom triggered wild swings in local trading this morning. His suggestion to pay a dividend to South Korean citizens using taxes on AI profits sent the leading Kospi index initially more than 5% lower. He later clarified that he wanted to tap “excess tax revenue” instead of implementing a new windfall tax on corporate profits, but that offered only partial relief. The Kospi currently loses 2.75%. Just ahead of the comments, the index was within reach of the 8k mark for the first time ever.
