Market update: Starmer clings on, as we wait for CPI

Market update: Starmer clings on, as we wait for CPI

By Kathleen Brooks, research director at XTB

Financial markets are highly sensitive ahead of today’s US CPI report. There are multiple triggers of volatility for investors to keep an eye on including the tentative nature of the Iran/ US ceasefire and the political turmoil in the UK. Below we look at the top three things to watch today.

1, UK political turmoil

Kier Starmer has stood up to his detractors from within the Labour Party and promised to fight on. It turns out that the likes of Andy Burnham are in fact very aware of the UK bond market, and today’s large spike in bond yields may have put them off making a move to oust the Prime Minister in the short term.

Starmer said that no challenge has been lodged, which means that he lives to fight another day/ afternoon? If a challenger can’t stand up against Starmer when he is this weak, it suggests to me that the PM could be safe for now.

But the economic and financial backdrop is grim. Bond yields in the UK remain elevated, although they have backed away from earlier higher. Yields are currently higher by 9bps today, earlier they were higher by 12bps. The UK still has the highest borrowing costs of any G7 member, and our yields have risen at the fastest rate since the Middle East war started. Until a challenge from the left of the Labour party is eradicated, or the government embarks on growth-positive economic policy, we do not see UK bond yields substantially falling from here.

The pound has also stabilized, and GBP/USD is just above $1.35. The market is willing to wait and see but remains extremely sensitive to news out of Westminster. Ultimately, it could be the bond market that saves Starmer, as it’s unlikely bond traders would trust anyone else at this stage.

But, with UK 10-year yields at their highest level since 2008, and 30-year yields back at 1998 levels, the recent upheaval and spike in yields could be worse than the Truss crisis in 2022.

2, Oil

The oil price remains elevated, and is higher by 3% today, Brent crude is above $107 per barrel. We doubt that there will be any change in the diplomatic deadlock between Iran and the US in the near term, as the President and his team turn their focus to China and Wednesday’s summit. Due to this, there are unlikely to be any major developments that will dampen upward pressure on the oil price for the next day or two.

3, US CPI

This is released at 1330 BST today. Expectations are for a rise to 3.7% YoY for April, up from 3.3% in March. Any upside surprise could boost rate hike expectations from the Fed for 2027. If this happens, then it could knock sentiment for risky assets, and trigger a selloff in US stocks from record highs. This is already a febrile environment for global bonds, and US long term yields have been moving in unison with UK yields. The 30-year Treasury yield is at 5%, the highest level since the financial crisis. US yields are also in the spotlight right now and will remain sensitive to this CPI report.

Overall, this volatility is everywhere, but make sure you watch the bond market on both sides of the Atlantic.