Good morning. Price action in currency markets is slowing to a crawl and the dollar is consolidating yesterday’s gains as traders keep their powder dry amid a lack of clear directional catalysts. Brent crude futures are holding near $106 a barrel and West Texas Intermediate is flirting with $102 after India said one of its vessels had come under attack off the coast of Oman and multiple sources reported an Iranian seizure of a ship anchored off the United Arab Emirates. Equity indices are advancing on reports that the US will permit Nvidia to sell its second-most advanced artificial intelligence chip to a number of Chinese firms, suggesting that talks between President Trump and General Secretary Xi Jinping are yielding progress on trade.
The British economy outpaced all of its major counterparts in the first three months of the year, with a pick-up in March pointing to a surprising degree of momentum heading into the second quarter. According to data published by the Office for National Statistics this morning, gross domestic product grew 0.6% in quarter-over-quarter terms, after expanding just 0.2% in the final quarter of 2025. The acceleration was broad-based: services, manufacturing and construction all contributed, underpinned by solid gains in household and government spending.
Traders are sceptical. For six consecutive years, gross domestic product prints have been front-loaded—coming in strong in the first quarter before slowing through the rest of the year—raising questions about seasonal-adjustment distortions. The war in Iran is expected to weigh on the second quarter as higher energy prices crimp consumer spending and business investment, and with swap markets pricing at least two Bank of England rate increases this year, growth headwinds could intensify thereafter. Political uncertainty is also mounting, with several candidates reportedly on the verge of launching leadership challenges against sitting prime minister Keir Starmer. Sterling barely flinched on the print, and gilt yields stayed at lofty levels.
US yields remain elevated after wholesale inflation accelerated last month to its fastest pace since 2022, when Russia’s invasion of Ukraine compounded the post-Covid supply shock. Data from the Bureau of Labor Statistics showed the producer price index for final demand—often viewed as a leading indicator for consumer price pressures—climbing 6.0% in the year to April, up from 4.3% in the prior month. Excluding volatile food, energy, and trade services, the index rose 4.4% over the past year, the sharpest 12-month increase since 2023 and clear evidence of second-order effects spreading through the broader economy. Ten-year US government bonds are yielding 4.45% this morning, while thirty-year paper holds above 5%.
This morning’s retail sales report is expected to show spending growth slowing in April from the prior month on a proportionally smaller jump in gasoline prices. Headline growth is forecast at 0.5% in month-over-month terms, down from a blistering 1.7% in March, after the seasonally-adjusted rise in average gas costs decelerated to roughly 5% from 21%. So-called “control group” sales—which strip out gasoline, cars, food services, and building materials—are seen slowing to 0.3% on the month, from 0.7% previously. Overall consumer spending may be cooling, but energy-cost cannibalisation and seasonal distortions are playing havoc with the data, and it could take several months before a clear picture of underlying trends emerges.
Against this backdrop, investors think incoming Federal Reserve chair Kevin Warsh will find his room for manoeuvre severely constrained, meaning that policy rates could remain unchanged for a prolonged period in defiance of the White House’s wishes. Warsh, nominated by President Trump earlier this year, won Senate confirmation yesterday in a 54–45 vote, the narrowest margin in the institution’s history, with only one Democrat—Senator John Fetterman—joining his Republican counterparts in support, and will face wariness from his counterparts on the rate-setting committee. With labour markets showing resilience and inflation pressures building for at least the third time in six years, calls for monetary easing are unlikely to find a receptive audience—and should he attempt to counter this by rhetorically signalling a dovish near-term outlook, or returning to his longstanding focus on shrinking the Fed’s balance sheet, the yield curve could steepen sharply, undoing any stimulative effects on the economy. For now, futures traders are expressing a mild hawkish bias, with a rate hike seen landing toward the end of next year.