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The flash PMI data showed a notable slowdown in activity in the UK and Europe, suggesting the prolonged conflict in the Middle East was impacting not only inflation but also the outlook for economic growth. In contrast, the US flash PMI data was largely unchanged and remained in ‘expansion’ territory. The downturn in UK PMI data, combined with softer employment and inflation numbers this week, suggests the urgency for the Bank of England to hike interest rates is easing. The UK data is consistent with growth of just 0.1% in Q2, a significant slowdown from the 0.6% growth seen in Q1. The outlook for the eurozone appeared equally gloomy with the overall PMI data moving into ‘contraction’ territory thanks to a slump in the services sector. Given eurozone growth in Q1 was only 0.1%, the downside risks are clear. But will the European Central Bank prioritise inflation or growth concerns? Markets are still pricing a 90% probability the central bank will hike rates by 25 basis points early next month.
- The Iran conflict was never far from the headlines though the oil price has eased over the course of the week, with hints from President Trump that a peace deal is close. Softer oil prices have also helped to ease inflation worries, which in turn have seen bond yields fall from recent highs. Trump’s language continues to be mixed however; the President warned early in the week that “the clock is ticking” and suggested only an intervention from Gulf allies halted a restarting of military operations.
- There was better news in the UK from the IMF upgrading their growth forecast for 2026, and also government bonds outperformed thanks to calming words from potential new Labour Leader – and therefore Prime Minister – Andy Burnham on government spending. The IMF said the strong start to 2026 would likely see growth for the year at 1.0%, up from their previous forecast of 0.8%. The IMF warned of risks from the Middle East conflict but noted the Bank of England did not need to raise rates from their current level of 3.75% yet to deal with inflationary pressures. Andy Burnham committed to following Chancellor Rachel Reeves’ existing fiscal rules and said he had no plans to change them. A poll of Labour Party members by YouGov showed Burnham would defeat current Prime Minister Keir Starmer by 59% to 37% in a head-to-head vote.
By the numbers
5% – the level of UK unemployment in March, up from 4.9% in February and higher than expected. The HMRC Payrolls data showed a sharp fall of 100,000 in April; this was the worst single month since the pandemic. We have seen similar numbers in the past, only for significant revisions to erase such dramatic figures but the overall picture is one of a softening labour market.
6 million barrels – the volume of oil said to have passed through the Strait of Hormuz in one day this week, thought to be the highest level since the start of the war in February. The Financial Times reported two super tankers carrying Iraqi oil to China passed through the Strait of Hormuz on Wednesday, and a third travelling from Kuwait to South Korea also appeared to be transiting the Strait before its transponder was switched off. Collectively, the ships were carrying 6 million barrels of oil.
- 8% – the year-on-year (YoY) figure for UK inflation in April, down from 3.3% in March and lower than expected. Petrol prices were up 23% YoY in April, the sharpest increases since September 2022. Clothing and footwear prices also increased, but were offset by a reduction in regulated energy prices thanks to the energy price cap for the April to June period. Services inflation eased to 3.2% in April from 4.5% in March, well below expectations. Core CPI was 2.5% vs 2.6% expected.
- $2 trillion – the potential market capitalisation of SpaceX, the combined space exploration and AI company that filed for an initial public offering this week. The company is set to list on Nasdaq in June, and is set to raise around $75 billion, with an overall valuation of $2 trillion. Two other AI companies – OpenAI and Anthropic – are also set to IPO this year, both with valuations set to be over $1 trillion.
Market movers
- Bond yields saw a welcome easing in the UK this week – with economic data and reassurances from the prospective Labour party leader on his plans for the public finances helping with the outlook for inflation and interest rates. The IMF also noted that monetary policy is currently tight enough with no urgency to raise interest rates. This makes sense for the moment given the tightening in financial conditions we have seen already with higher bond yields impacting borrowing costs for households and corporations. The softer inflation and employment data eases immediate expectations for rate hikes. However, it may only be a short reprieve in terms of inflation given the likely trajectory for CPI with the household energy price cap still set for a double dight increase in July because of the Middle East conflict. Markets may not now be pricing a third rate hike this year because of this week’s data, but hikes in September and December are still expected given underlying inflationary pressures, and secondary impacts in sectors such as food and transportation are still expected to push CPI closer towards 4% or beyond in the coming months.
The investment lens
- Is ‘weekend risk’ back? If President Trump’s timeline holds, then this weekend could see a potential return to US military operations against Iran. Trump held off on restarting the war earlier this week because “serious negotiations were taking place”. But he warned that a delay on military action was for “for two or three days” on the basis that his Gulf allies believe “we’re getting very close to making a deal”. We will find out if Trump’s threat that the “clock is ticking” is genuine but equally Iran has stated that they will not be “forced into surrendering” while Iran’s Revolutionary Guards warned of retaliation both in and beyond the Middle East. Meanwhile, the Strait of Hormuz appeared a little less ‘closed’ this week, given the super tanker movements through the Strait.
- The super tankers appeared to follow a pathway along the northern side of the Strait, a route designated by Iran; this suggests the movements took place with Iranian permission, and a toll may well have been paid. Iran reported that a significant number of ships had navigated the waterway this week after a new agency was established to administer shipping permits and charge tolls. The Persian Gulf Strait Authority is described by Tehran as the “legal entity and representative authority for managing he passage and transit through the Strait of Hormuz”. While some ships may well manage to navigate the waterway, we are a very long way from normality, and the situation will not be fully resolved until two-way traffic is restored.
- If we are to return to a ‘hot war’ there could be some pain for equity markets that appear to have moved on from conflict related worries many weeks ago, while the volatility in bond markets and upwards moves in bond yields may not be an end if a resumption in hostilities pushes oil prices higher once again.
