Markets
The prolonged sell-off in bonds (especially long-term) since the beginning of the war between the United States and Iran has stopped today. Two “story threads” may have helped relieve the pressure at least temporarily. The 20-year Japanese government bond auction received above average interest from investors. It is too early to reach any conclusion about whether Japanese LT bonds have found some kind of acceptable equilibrium. However, it has silenced one of the canaries in the coal mine. The 20-year Japanese bond yield fell by 4.5 basis points (to 3.72%). The 30-year index gave up 6.7 basis points (to a high of 4.1%). Next to Japan, UK bond markets have often served as a barometer for inflation, and even more market stresses linked to public finances. Here, UK inflation data for April also brought some “comforting news”. Headlines (0.7% m/m; 2.8% y/y from 3.3%), core (2.5% y/y from 3.1%) and more services inflation (3.2% from 4.5%) all came in well below market expectations. Headline inflation even fell to the lowest level since March 2025. This decline was due in large part to favorable base effects and measures to ease consumers’ utility bills which led to a softer year-on-year figure for housing and consumer-related services. The consumer price index for goods rose from 2.1% year-on-year to 2.4%. The April CPI improvement is expected to be reflected later due to upward pressure on prices of commodities and other commodities. However, the better-than-expected starting point brought some relief to the UK bond market as well. Markets see this as providing the Bank of England additional time to adjust its reaction. UK yields fall between 10 basis points (2 years) and 8 basis points (30 years). Markets have also reduced the likelihood of the Bank of England raising interest rates in June and the end of July to around 15% and 65% respectively. Interestingly, the UK Government today also announced the postponement of a planned increase in motor fuel duty which was due to begin in September. Clearly, this type of inflation relief comes with a financial cost. At the time of writing, Bank of England Governor Bailey and other members of the Monetary Policy Committee have testified before Parliament’s Treasury Committee. Early comments already suggest that the Bank of England will take some time to assess further developments, as the cancellation of interest rate cut expectations has led to a tightening of financial conditions.
Some calm has also returned to broader markets after a “risk realignment” in previous days. This was not in the least supported by any news that the US and Iran were close to reaching an agreement. Iran today responded to President Trump’s threats to launch a new strike with a warning that it may retaliate outside the Middle East. Despite this ongoing impasse, the price of Brent crude oil fell slightly ($108 per barrel). Obviously, this does not change the broader picture of inflation. However, US bond yields fell 1-2 basis points across the curve. Bonds even outperform significantly with yields falling from 5 basis points (5-10 years) to 3.5 basis points (30 years). However, these moves are “insignificant” following the recent repositioning. In the FX markets, the dollar is holding on to its recent gains as the dollar index tests the 99.35 resistance level and the EUR/USD pair slips below the big 1.16 figure. USD/JPY remains closed near 159 despite further Finance Ministry warnings about possible interventions in the Japanese yen. Sterling is also reacting positively to lower than expected inflation and lower yields. EUR/GBP is losing some pips near the 0.8655 EUR/GBP level. Shares also enjoy some relief with Nvidia’s earnings announcement later today (Nasdaq +0.5%, Eurostoxx 50 +0.8%)
News and opinions
Belgian consumer confidence continued to weaken in May. The benchmark index fell from -9 to -10, the lowest level since April 2025, and continues to decline for 4 consecutive months coming from a 4-year high of 4 in January. The long-term average (2006-2025) is about -7. The decline in May was mainly due to less optimistic expectations regarding unemployment (14 from 6). Compared to March (-45) and April (-43), consumers have become less pessimistic about the overall economic situation in Belgium (-37). Households expect a slight improvement in their financial situation (-4 out of -5) but again revised their saving intentions downward (14 out of 18; lowest since early 2024) for the next 12 months.
The Bank of Indonesia raised its key interest rate by more than expected, with the first hike since 2022 raising the key interest rate from 4.75% to 5.25%. This compares to the post-Covid peak rate of 6.25%. Governor Warjiyo described the decision as a follow-up step to stabilize the rupee (following about $10 billion in interventions earlier this year) against the impact of increased global volatility caused by the conflict in the Middle East, as well as a proactive step to ensure that inflation in 2026 and 2027 remains within the target range of 1.5% to 3.5%. Ongoing interventions in the foreign exchange market and supervision of banks and companies with high dollar purchasing activities are also part of the BI toolkit. In today’s hawkish shift, Bank Indonesia is prioritizing external stability and resilience over economic growth, although it still expects GDP to be within previous expectations of between 4.9% and 5.7% for this year. The Indian rupee has rebounded from its all-time low against the dollar at 17,748 to 17,650 currently. The USD/INR was trading at 16,750 before the conflict in the Middle East began.
