Market sentiment is driven by headlines this morning amid the ongoing situation in the Middle East. The weekend's events were largely centred on the US waiting for Iran's response to a peace deal, which, unfortunately, culminated in both sides walking away empty-handed again.
Tehran reportedly declined to dismantle any nuclear plants but offered to move some of its highly enriched uranium to a third country, according to the WSJ. As you can imagine, this did not sit well with President Trump, describing the response as 'totally unacceptable'.
Frankly, I feel markets had priced in more optimism than was warranted, and this morning is a reminder of that. In my opinion, with the Strait of Hormuz still largely closed, this remains the largest driver for markets. Oil benchmarks gapped higher at the open - Brent and WTI are both trading up more than 5% this morning - the USD caught a bid, though US equity index futures (and European cash indexes) are largely unmoved on the news, highlighting the ongoing disconnect between stocks and bonds.
With Trump heading to Beijing for a summit with China's President Xi later this week, China is also very much back in the spotlight, given that it is Iran's biggest oil buyer and a key diplomatic backer.
Last Friday also saw the April US employment report land, which showed the economy added 115,000 jobs, surpassing expectations of a 62,000 gain, though this was a deceleration from March's 178,000. Unemployment (U3) remained unchanged at 4.3%, which is just below the Fed's year-end projection of 4.4%. MM wage growth was also unchanged at 0.2% (versus expectations of 0.3%), leaving the YY measure at 3.6%, lower than the 3.8% forecast but slightly higher than the previous 3.5%.
The latest jobs data will probably not change much regarding upcoming Fed meetings. Markets are pricing in a small chance of a rate adjustment this year, with just 7 bps of tightening. In my view, the labour market is not falling off a cliff and does not need rescuing at this point, leaving the Fed to focus on inflation.
Closer to home for me, it was a busy weekend for UK politics following Reform UK's historic local election gains last week that have left the Labour Party in open revolt. Former deputy PM Angela Rayner issued a pointed Sunday statement stopping just short of an explicit bid while backbencher Catherine West has declared she will move if PM Keir Starmer's reset speech this morning does not satisfy her.
A contest is now likely to produce a more centrist Labour leader, which is less of a problem for the bond market. A delayed transition that gets Andy Burnham into Parliament first raises the prospect of a more expansionary fiscal agenda, and with 30-year GILT yields at highs of nearly 6% - levels not seen since 1998 - the room for manoeuvre and uncertainty are somewhat lacking.
Today's data docket is light; there is very little scheduled that should meaningfully move markets, and price action will remain dominated by geopolitical headline risk and any fallout from Starmer's speech.
Tomorrow is where things could become interesting; the April US CPI print drops at 12:30 pm GMT. Consensus suggests the YY headline print will accelerate to 3.7% from 3.3% in March, with the core measure also nudging up to 2.7% from 2.6%. The lagged pass-through from higher fuel costs is already baked into those expectations, meaning a miss in these data - below 3.3% and 2.6% for headline and core, respectively - could prove a more meaningful market mover for the USD and yields.