Markets
British Prime Minister Keir Starmer has announced that he will step down as leader of the Labor Party and become Prime Minister. After his party’s big loss in May’s snap elections, the British Prime Minister faced further erosion of political support within his party. Last week, the main contender for prime minister, Andy Burnham, in a by-election secured the House seat needed to officially start the procedure. Prime Minister Starmer has reached the inevitable conclusion. Today, he asked the party to open the nomination procedures for a new leadership, with the nomination to take place between July 9 and 16. However, the chances of such a contest being held have declined significantly, with former Health Minister Wes Streeting, one of the main opponents of Burnham’s contest, having already given his support to Burnham. In the event of a no contest, Burnham could take over as prime minister in the middle of next month. The market’s reaction to the expected change in leadership was benign even as Burnham was initially seen as open to more spending and perhaps a less stringent fiscal framework. UK yields fell after some volatility surrounding Starmer’s announcement by 4-5 basis points. Sterling is also reacting in an orderly, even constructive way. After trading in the 0.8680 area early this morning, the pound is back at the 0.863 EUR/GBP area. Markets may take some comfort from the fact that in the absence of formal competition, the chances/risks of candidates making “expensive promises” are reduced. We do not draw firm conclusions yet. In any case, the new UK Prime Minister will face the same financial constraints and market scrutiny as his predecessor.
US and EMU yields today show a mixed picture. US yield markets rose after closing on Friday by 3-4 basis points to at least partially catch up to Friday’s rise in the EAs. Meanwhile, German yields fell by 4.5-2.5 basis points in what we consider to be essentially a technically inspired trade. ECB President Lagarde reiterated to the EU Parliament that there is no need for stronger action at the moment and that the bank is confident that inflation will return to target with appropriate monetary policy measures. The headlines of the US-Iran negotiations do not provide any clear guidance to the market. After escalating tensions over the weekend (comments by President Trump; ongoing attacks between Israel and Hezbollah in Lebanon), Brent crude briefly jumped to $82 per barrel only to retreat to below $79 per barrel currently, with Iran indicating that mediators Qatar and Pakistan had facilitated “significant progress” in the talks. European stocks show modest gains (EuroStoxx 50 +0.4%). US indices opened little changed (S&P 500 +0.2%). There are also no major movements in the major exchange rates for the US dollar. At EUR/USD 1.143 and DXY 101, the US currency easily maintains last week’s gains as markets evaluate the concrete action taken by the Fed as the MPC statement said it will fulfill its mandate of price stability.
News and opinions
A batch of Polish economic data for May surprised largely to the downside today and kept the zloty on the defensive, including against its regional counterparts (Czech Koruna and Hungarian Forint). EUR/PLN rose towards 4.27, heading towards the highest closing level since early April. Polish swap yields lose more than 3 basis points across the curve. Despite this, financial markets continue to err (slightly) in the direction of raising interest rates rather than lowering them. Retail sales rose 4.4% year over year last month, up from 2.8% in April but well below the 6.7% expected. After correcting for inflation, sales fell by 1.7% m/m (vs. -0.9% expected) after a 0.8% decline in April. Wages fell by 3.8% month-on-month, taking the annual reading from a five-year low in April (5.4%) to a lower-than-expected 5.8%. The labor market data was somewhat in line with the consensus but offered little reason to cheer. Employment decreased by 0.1% m/m (-0.9% y/y). In the past two years, monthly employment has actually increased on only three occasions. Producer price index inflation stabilized in May, missing expectations for a 0.3% increase.
Canadian inflation rose by more than expected by 1% month-on-month in May, pushing the annual figure from 2.8% to 3.2%. This is the fastest pace since December 2023 and above the Bank of Canada’s 1-3% target range. High gasoline prices (33.2% year-on-year) continued to drive the acceleration. But even without that, the CPI still accelerated from 2% to 2.2% in May, Statistics Canada said. Core inflation excluding food and energy rose 1.6% compared to 1.5% in April. The Bank of Canada’s preferred measure, which trimmed the average core CPI, is in line with April’s five-and-a-half-year low of 2%. Today’s numbers were in line with expectations and slightly higher. The Canadian dollar strengthened marginally to 1.416 USD/CAD. The pair was approaching the 1.42 mark earlier in the day, a level last seen in April 2025. The Bank of Canada at its June meeting showed little haste to respond to the current inflation spike, citing the underlying inflation trend and the view that the economy is operating below its potential. Canadian financial markets have a 70% chance of raising interest rates at the end of 2026.
