Good morning. Oil prices are edging lower and the dollar is strengthening after President Trump said he had suspended a planned bombardment of Iran, leaving market hopes for a reopening of the Strait of Hormuz effectively in limbo. “We were getting ready to do a very major attack tomorrow, and I put it off for a little while, hopefully maybe forever, but possibly for a little while, because we’ve had very big discussions with Iran, and we’ll see what they amount to,” Trump said. In a social media post earlier in the day, he told the US military to be “prepared to go forward with a full, large scale assault of Iran, on a moment’s notice in the event that an acceptable Deal is not reached”*. Brent crude is trading at $111 a barrel, down 1% from the previous session, West Texas Intermediate is going for $108—up another 20% in the last month—and the trade-weighted dollar is 0.2% higher.
The pound is retreating in line with its peers after data showed growing slack in the labour market, easing wage-price pressures that might otherwise force the Bank of England to tighten policy more aggressively. An update from the Office for National Statistics showed wage growth slowing, unemployment rising, and vacancies falling in March, giving the central bank room to hold rates for now. Gilt yields are holding steady after Andy Burnham, the presumptive challenger to Sir Keir Starmer for Labour Party leadership, pledged to maintain the current conservative fiscal stance, saying “I never said you can just ignore the bond markets,” helping calm fears of a surge in new borrowing**.
The Canadian dollar is slipping ahead of this morning’s April inflation report. Headline consumer prices are seen climbing 3.1% from the same period a year ago, while the core measures preferred by the Bank of Canada—which remove food and energy categories—are expected to stay anchored around the 2.2% mark, giving policymakers room to keep rates on hold for longer. With the economy still nursing a hangover from recent tightening, household debt servicing costs eating into consumer spending, the housing market still softening, and energy-sector investment showing only modest signs of life, current market pricing for two rate hikes by year-end looks too aggressive—but the Canadian dollar could grind higher anyway if the US dollar retreats as we expect later this year.
Friday’s turbulence in bond markets has abated somewhat, but global yields are holding near multi-year highs as governments remain on unsustainable fiscal trajectories, central banks withdraw balance-sheet support, and inflation risks grow more acute amid the conflict in the Middle East. While there are idiosyncratic differences under the hood—Japan and Europe dealing with more extreme increases in imported energy prices, the UK embroiled in another episode of political turbulence, and the US borrowing more than all of its advanced-economy counterparts put together—the broad direction of travel is the same: the era of cheap sovereign debt is over, and the economic tradeoffs are becoming more complicated.There are idiosyncratic differences beneath the surface — Japan and Europe contending with more extreme increases in imported energy costs, the UK embroiled in another bout of political turbulence, and the US borrowing more than all of its advanced-economy counterparts combined — but the broad direction of travel is the same: the era of cheap sovereign debt is over, and the economic trade-offs are becoming more complex. A sustained rise in global real yields could put additional strain Should yields remain at these levels—or climb further—the probability of a multi-faceted global slowdown rises materially, with downside risks concentrated in rate-sensitive economies like the United Kingdom, Canada, Australia, New Zealand, and South Korea, on emerging-market countries carrying dollar-denominated debt, and on so-called “long duration” equities.
Against this backdrop, tomorrow’s Federal Reserve meeting minutes could have a broad-reaching impact on currency markets. At the time of the April meeting, three officials dissented in favour of changing the official statement to reflect a more neutral stance of monetary policy, but the minutes could show others leaning in a similar direction. Any sign that hawks are gaining the upper hand could nudge Treasury yields higher, weigh on rate-sensitive equities, and propel the dollar higher, with futures already putting near-60% odds on a rate hike by the end of the year. Much is at stake.
*Cut to a view of military planners screaming into their pillows.
**No one wants to be Liz Truss. Least of all, Liz Truss.