UK Gilt Yields Retreat as PMI Signals Contraction

UK 10-year gilt yields fell to 4.95%, pulling back from multi-year highs, as investors digested S&P Global flash PMI data and Middle East developments. The survey revealed the UK economy contracted in May amid rising political uncertainty and the escalating impact of the Middle East conflict, with businesses reporting falling output, surging inflation, supply shortages, and job cuts. The contraction followed earlier data showing April inflation undershot expectations and the jobs market weakened unexpectedly, complicating the Bank of England's policy path as it is expected to deliver at least two rate hikes this year. Brent crude held near four-year highs after President Donald Trump said Iran negotiations were in the "final stages" but warned of renewed military action if Tehran rejected his terms. In the UK, Chancellor Rachel Reeves prepared to announce cost-of-living measures, though a proposed cap on essential grocery prices was abandoned following industry backlash.

UK 10-year gilt yields fell below 5.1% as investors further reduced their bets on Bank of England rate hikes following weaker-than-expected UK inflation data. Headline inflation dropped to 2.8% in April, below the 3.0% forecast and the lowest since March 2025, after the UK energy regulator introduced a price cap on April 1. Both services and core inflation also undershot expectations, though fuel inflation surged to a 2022 high amid the conflict in Iran. This follows Tuesday’s jobs report, which signaled a labor market slowdown: the unemployment rate rose unexpectedly to 5% in Q1 2026, regular wage growth hit its weakest level since late 2020, and job vacancies dropped to their lowest since 2021. Markets are now pricing in just two BOE interest rate increases by December. Still, gilt yields remain close to multi-year highs as US-Iran talks to reopen the Strait of Hormuz and end the war remain stalled, keeping crude prices at four-year highs.

UK 10-year gilt yields held steady at 5.07% as traders scaled back expectations for Bank of England rate hikes after weak jobs data, partially offsetting last week’s 26-basis-point surge amid political and inflation concerns. Payrolls fell by 100,000 in April, the largest drop since May 2020, while unemployment rose to 5%, wage growth slowed to 3.4%, and vacancies hit their lowest level since 2021. Markets now anticipate only two BoE rate increases by December. In politics, Andy Burnham, the frontrunner among potential leadership challengers to Prime Minister Keir Starmer, yesterday ruled out changing the government’s borrowing limits, easing fears of looser fiscal policy, while Starmer insisted he would not step down even if Burnham wins the byelection, setting the stage for a possible leadership contest. Elsewhere, Brent remained near a four-year high after US President Trump delayed further strikes on Iran but warned of a possible "full, large-scale assault" if talks collapse.