HL commentary as it happens

MPC cites war in Iran, and likely impact on inflation and growth

Our house view is that the rate is held whilst the conflict is active, and the Strait of Hormuz restricted. However, we recognise that there’s significant continued uncertainty and that volatility in the gilt market is expected to continue. We think, unlike in 2022, the weaker jobs market constrains the likelihood of wage inflation. But the Bank of England is unlikely to cut base rate until later in the cycle. We additionally think a domestic recession is unlikely, though note that the outlook for UK growth is anaemic, and recently downgraded by the IMF, which will impact consumer confidence.

Bank of England holds rates at 3.75%, voted by a majority of 8–1

The Bank of England’s decision to hold rates today at 3.75% is very much as the market expected. Only the Bank’s economist Huw Pill voted to raise rates, against 8 other members who voted to hold. The Bank has also released scenario analysis related to the war in Iran, and the effect on inflation and economic growth. Their most likely scenario recognises that the conflict has impacted prices and would continue to do so, but that for now it was sufficient to monitor markets rather than act on rates. Gilt yields have fallen on the news. Markets were concerned that the vote would be more divided, and that the forward guidance starker.

Oil prices at four year-highs

Brent crude prices have risen to over $113 per barrel, levels not seen since 2022, after President Trump rejected Iranian proposals to re-open the Strait of Hormuz and speculation mounts on the resumption of military action by US forces. A bigger than expected 6.2 million barrel drawdown of US crude inventories last week has also contributed to the squeeze on prices.

US PCE, GDP, and jobless claims in focus later today

The personal consumption expenditure (PCE) index will provide a key touchpoint to determine how tariffs and the Iran conflict are feeding through to prices. The oil price spike means the headline number is forecast to rise sharply from 2.8% last month to 3.5% on an annualised basis. Core PCE which excludes food and energy is expected to show a more modest 0.2 percentage point expansion to 3.2%. Initial Q1 GDP data will be released simultaneously and is expected to show a rebound from 0.5% in Q4 2025 to around 2.4% but it’s not necessarily a sign of universal optimism. The numbers are likely to be inflated by government spending, with the prior quarter still feeling the effects of the Washington shutdown. AI investment is also providing a tailwind, but consumer sentiment remains fragile. Given the complex puzzle that makes up GDP, labour market data could provide a more reliable indicator of economic health, with consensus forecasts pointing to stability in weekly jobless claims which are expected to come in just under the 214,000 reported last week.

FTSE 100 opens slightly up, Bank of England rate decision due at midday.

The FTSE 100 opened slightly up ahead of the noon announcement of the Bank of England’s monthly interest rate decision. We’re not expecting a change from the 3.75% baseline but will be keeping an eye on the vote split following a closer than expected vote by the Monetary Policy Committee’s counterparts at the Federal Reserve Bank yesterday. The post meeting press-conference will also be a key point of focus given the divergence between market expectations of a hike or two by the end of the year, and a consensus by forecasters that rates will remain steady until at least 2027. With 10-year gilt yields now over 5%, the highest since the Great Financial Crisis, the Treasury will also be hoping for a more doveish outlook on borrowing costs.

All eyes on the US – Federal Reserve interest rate decision and conference

S&P 500 futures are also trading flat this morning. The Federal Reserve is due to deliver its latest interest rate decision today, with no change widely expected. The inflation picture remains uncertain, progress had been encouraging prior to the escalation of conflict in the Middle East, but the situation has since become more complex. The Fed, in common with other major central banks reporting this week, including the Bank of England tomorrow, is expected to hold steady until greater clarity emerges. The longer the conflict persists and the Strait of Hormuz remains disrupted, the more pronounced the inflationary pressures are likely to become. I’ll be listening out for Powell’s comments on this and any concerns on what central bankers call ‘second round effects’ from higher prices – that’s when they worry about higher costs feeding into higher wages and inflation becoming more embedded. It’s expected to be Powell’s last as Fed chair.

Brent crude hovers $110 per barrel as UAE signals leaving OPEC 

The UAE has confirmed its departure from OPEC, a move that has been anticipated for some time, though the timing is notable. As one of the few producers within the cartel capable of rapidly scaling output up or down, the UAE has long been a strategically significant member. However, its ambitions have increasingly diverged from those of Saudi Arabia, OPEC’s dominant force. Riyadh has consistently favoured supply restraint to support elevated prices and meet its substantial fiscal requirements. The UAE, a smaller but wealthier nation accounting for approximately 3.5% of global supply, would like to prioritise higher production volumes and a faster transition away from hydrocarbon dependency in preparation for a post-carbon economy. This strategic divergence has ultimately proved irreconcilable.

Despite the news, oil prices have remained broadly flat this morning, prices nonetheless remain well elevated relative to historical norms. The blockade of the Strait of Hormuz continues to be a significant overhang, and US-Iran peace talks appear to have stalled. Issues spread beyond the oil price itself: it's about LNG, availability of refining capacity and the ability to ship vital supplies to several sectors such as helium for semiconductors, urea and ammonia for fertilisers for the agricultural sector.

Central Banks in focus, with the UK and US expected to hold

Central banks move into focus this week, with the Bank of Japan kicking things off with a widely expected hold, albeit with signs of growing unease around inflation. The Federal Reserve looks set to follow suit, with markets firmly pricing in no change as policymakers weigh the impact of higher energy costs on the outlook. In the UK, while some are still calling for a hike, the base case remains a hold, though a split vote can’t be ruled out as inflation risks lean to the upside. Energy remains the key swing factor. The longer the disruption in the Strait of Hormuz persists, the more pressure it builds on inflation expectations, raising the chance that central banks will be forced to lean more hawkish in the months ahead.

US markets hit all-time highs as AI powers on

US markets look set for a softer open, with futures edging lower, but that comes after a strong session which saw both the S&P 500 and Nasdaq close at fresh all-time highs, led once again by AI-exposed names. The tone this earnings season has been telling, with chipmakers’ beats continuing to be rewarded while any disappointment from software names is being met with a sharper reaction. That split points to a market still leaning into AI infrastructure spend, suggesting we may not have reached a peak for chips or a trough for software just yet.

Equity markets set for a soft open

Global equity markets look set for a softer start, with US futures pointing lower as investors weigh ongoing uncertainty in the Middle East. Talks between the US and Iran appear to be inching forward, but progress is slow, and the Strait of Hormuz is essentially shut, keeping oil prices elevated around the $100-110 mark. Earnings season has helped markets look through the disruption, but the longer key oil flows remain constrained, the greater the risk that higher energy costs begin to bite. We are not there yet, but markets are edging closer to a point where a prolonged supply shock could start to weigh more meaningfully on sentiment.

US core inflation (PCE) on Thursday (Consensus 3.2%)

US PCE (Personal Consumption Expenditure) prices this week will provide Kevin Warsh with food for thought for potential policy decisions later in the year. The headline year-on-year number, which includes energy costs, is forecast to have jumped from 2.8% in February to 3.5%. Core PCE, the Fed’s preferred measure of inflation, is also expected to have risen, albeit by a smaller margin of 0.2 percentage points to 3.2%. Anything materially higher than that could see hopes for rate cuts, currently tentatively pencilled in for September 2027, pushed out even further. However, it’s developments in the Gulf that will remain the bigger influence for now, with any progress likely to see bets firm again on an earlier resumption of the easing cycle.

S&P 500 futures little changed; this week’s Fed meeting in focus

S&P 500 futures are also trading flat this morning following Friday’s record close. A hold in Fed rates at 3.5%–3.75% is all but certain on Thursday, in what may be Jay Powell’s last meeting in the chair. The end of the criminal investigation by the Department of Justice into his renovation of the Fed HQ has seen Senator Thom Tillis, formerly seen as a stumbling block to Kevin Warsh’s appointment, come out in a supportive tone. The Senate Banking Committee is now expected to vote on Mr Warsh’s nomination on Wednesday.

Brent crude rises to around $107 per barrel

Lack of progress in Pakistan has seen Brent crude oil prices climb further to around $107 after adding 17% last week. President Trump participated in a call with Keir Starmer just hours after shots were fired at the White House Correspondents’ Dinner. The Prime Minister stressed that Britain does not support the US blockade and that naval efforts are focused on opening the Strait of Hormuz. With little in the way of a firm timeline for the resumption of unrestricted shipping, a key piece of the oil price puzzle.

Bank of England meets on Thursday, rates expected to hold at 3.75%

The Bank of England is one of several central banks setting rates this week. Given the uncertainty generated by the Middle East conflict, no change looks to be the order of the day, and the BoE is no exception, with markets expecting a hold at 3.75%. UK economic activity has been resilient so far, but much of this could be due to demand being pulled forward, and a slowdown is widely anticipated. Investors will be looking into the tea leaves of the meeting minutes for clues as to whether supporting growth or stemming inflation will be the priority later in the year.

FTSE 100 opens flat after US no-show in Pakistan

The FTSE 100 is down a touch this Monday morning following the lack of dialogue at this weekend’s proposed negotiations between Iran and the US, after President Trump instructed his delegates to stay at home. It may be that hopes of a diplomatic breakthrough were pretty faint to start with, and markets are now in wait-and-see territory ahead of a heavy week of earnings and economic touchpoints.