HL commentary as it happens

What lower than expected inflation means for retirees

The path for inflation looks uncertain and while we’ve seen a dip this month, there’s no telling what the future might hold. This can have huge impacts on pensioner budgets. State pensions are increased every year in line with the triple lock and final salary pensions also increase every year, but for those taking an income from a defined contribution pension managing inflation longer term is a key factor.

UK inflation undershoots forecasts 

UK inflation fell more than expected to 2.8% in April, below forecasts of 3%. Some temporary factors helped pull the number down – including changes to the Ofgem price cap and the timing of Easter. Even so, combined with a softening labour market, this gives the Bank of England a bit more breathing space.

It’s worth remembering that before the escalation in tensions between the US, Iran and Israel, investors had been expecting two rate cuts this year. Markets are now leaning towards the possibility of one or two rises instead. However, Bank of England Deputy Governor Sarah Breeden struck a more measured tone in the Financial Times this week, emphasising that the Bank’s role is to create a “stable environment” rather than act in a “trigger-happy” way. As she put it: “We don’t need to rush… we’re in a good place to be able to watch what’s happening in the economy.”

Any progress towards a Middle East deal will be critical in easing price pressures. These pressures are already having severe consequences for poorer nations, with reports of shortages and unrest from Kenya to Malawi. Gulf states, along with China and India, are increasing pressure on the US to help broker a resolution. At the same time, there are signs that some countries are becoming more willing to test the situation. A South Korean oil tanker, The Universal Winner, is currently attempting to transit the Strait carrying Kuwaiti oil, following two Chinese vessels that are believed to have already made the journey.

Oil prices ease a touch as US holds off on fresh attacks

Oil prices have eased a touch this morning, with Brent crude slipping back to around $110 a barrel after President Trump held off on a planned strike on Iran. That pause has given markets a reason to breathe, raising hopes that talks can restart after Saudi Arabia, Qatar and the UAE reportedly urged the US to give diplomacy more time. There are still big hurdles to clear, not least Iran’s nuclear programme and disruption around the Strait of Hormuz, but even a small step away from escalation matters when energy prices have been one of the biggest worries for investors.

Weak UK jobs data gives hope that the BOE can hold rather than hike

The latest UK jobs data puts a softer labour market back at the centre of the rates debate, and may help take some heat out of the recent rise in gilt yields. Payroll employment fell sharply in April, while vacancies and claimant numbers also point to a hiring backdrop that has weakened since the Iran war began. The important point for markets is that businesses appear to be responding to higher costs by cutting headcount, not by pushing wages materially higher to compensate workers. That should help keep the coming inflation spike contained to a short-term energy shock rather than the start of a wage-price spiral, giving the Bank of England a little more room to sit tight rather than rush into further rate hikes.

Mixed start for equity markets, UK set for positive open

Global equity markets are looking positive this morning, with the FTSE 100 building on yesterday’s strong showing as oil prices ease back from recent highs. President Trump’s decision to hold off on a fresh round of attacks on Iran has raised hopes that a deal may be close, helping ease some of the immediate heat in oil markets. But even if tensions cool from here, supply will not ramp back up overnight, leaving investors facing the prospect of elevated oil prices for a while yet. That could make for an uncomfortable few months, with higher energy costs feeding through to businesses and consumers.

Unemployment and inflation numbers to set the scene for Downing Street showdown

The rhetoric around a Labour leadership challenge is shifting from if to when. But with challenger Andy Burnham needing to contest the Makerfield by-election to secure his right to run for the top job, clarity could still be weeks away. Prolonged uncertainty is unlikely to ease pressure on gilt yields, with the 10-year nudging 5.2%, levels not seen since 2007.

Consumer Price Inflation (CPI) and unemployment numbers this week will offer a read on the economic backdrop the next prime minister will inherit. So far, the economy has been relatively resilient to oil price shocks, but the full impact has yet to feed through to prices and confidence. Higher-than-expected inflation or a negative surprise from the jobs market could reignite stagflation fears. Meanwhile, April retail sales and the latest GfK consumer confidence numbers will provide a useful temperature check on the high street.

The key forecasts for this week paint a mixed picture: Tuesday – unemployment expected to land 4.9%, unchanged month on month; Wednesday – CPI inflation forecasted to fall from 3.3% to 3.0%, with core inflation slowing from 3.1% to 2.7%; Thursday – retail sales growth is expected to slip from 0.7% growth to a 0.4% decline, Friday – GfK consumer confidence expected to remain close to last month’s one-year low of minus 25.

Brent crude climbs above $111 per barrel

Brent crude has climbed by around $2 this morning to above $111 a barrel, adding to last week’s steep gains. An escalation in drone attacks between Ukraine and Russia is a reminder that it’s not only Middle Eastern oil exports being disrupted by conflict. Russia remains the world’s second-largest exporter and, while restrictions on exports to countries such as India have been temporarily lifted, those waivers are set to expire soon.

Asian markets fall, with US and European futures in the red.

After a weekend of drone strikes on energy infrastructure in the Middle East and Russia, Asia-Pacific equity markets have started the week in the red. Since the Iran conflict began, concerns about energy supplies have been especially acute in the Far East, which is heavily dependent on oil imports. But the prospect of a prolonged period of elevated oil prices is weighing more broadly this morning, with futures pointing to a weak open for European markets and, later on, Wall Street.

Oil on track for 6% weekly gain

Oil prices are heading for a weekly gain of more than 6%, as stalled US-Iran diplomacy keeps supply fears firmly in focus. Flows through the Strait have already taken a heavy hit, with the IEA estimating a drop of around 4 million barrels a day in March and April. Even if resolved next month, the oil market could remain undersupplied through October, keeping inflationary pressures high and adding another headache for consumers, central banks, and, eventually, investors.

Equity markets cool after more record highs

After another strong session yesterday, global equity markets are starting today on the back foot, in another familiar turn of the see-saw pattern that has defined recent trading. But for all the day-to-day volatility, the bulls are still having the better of it, with the net effect being a steady grind higher across major indices. The S&P 500 passing 7,500 for the first time is the latest marker of that momentum, helped by a strong earnings season that continues to outweigh lingering inflation concerns. Investors are being asked to look through plenty of noise, but for now, earnings power is doing the heavy lifting.