Key Points 

• Sterling rallies to 3yr high as UK inflation tops estimates at 3.5%

• US rally ends as S&P 500 snaps 6-day win streak; Europe at 2-month highs, FTSE aims for 5th day of gains

• Oil jumps on report Israel is preparing to hit Iran – no uplift for BP and Shell

• MKS sees £300mn hit from cyber attack

• Elon Musk commits to leads Tesla for 5 more years

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Big Picture 

UK inflation surged to 3.5%, ahead of forecasts for 3.3%, pushing sterling to its highest level against the dollar since Q1 2022. GBPUSD trades north of 1.346 following the update with markets pricing for cuts this year down to ~35bps from 40bps prior to the update. Gilt yields rose with the 2yr gilt yield to 4.1% and 10yr above 4.75%.

It looks like household bills are the main contributor – swinging from a –0.7ppt drag to a +1.0ppt in April...which indicates a big shift in the base effect which will be comforting to the Bank of England. Core CPI did however jump to 3.8% from 3.4%, ahead of the 3.6% expected. Pay: +5.6%, and crucially services CPI +5.4% vs +4.8% y/y expected...markets pricing slower rate cuts this year. Huw Pill was out yesterday with comments pushing a slower pace of cuts yesterday...as said before I think slower but ultimately deeper.

This uptick in CPI has been on the cards and well discounted already, even if it's maybe a little juicier than anticipated. Inflation is likely to rise to 3.7% by September, according to the Bank of England's own estimates. This is partly because of increases in energy prices and increases in some regulated prices such as water bills. But thereafter we expect inflation to fall back to the 2% target, which will enable the BoE to cut deeper than perhaps the market currently expects. There are clearly risks around this assumption due to the sticky nature of services inflation, but generally it seems likely that inflation in the UK is on the way down. The BoE's continued caution on cutting any more quickly should offer sterling ongoing support against the broader trend of dollar weakness. 

Oil jumped on reports Iran is preparing to strike Iran...to borrow a darts aphorism, it’s geopolitics for show, economic fundamentals for dough. Oil majors BP and Shell haven't picked up any bid on this and trade weaker this morning, weighing on the FTSE a tad.

How is that US exceptionalism>US repudiation trade going? Wall St snapped a six-day win streak but is not far off the all-time highs. Europe has rallied to a two-month high and Germany’s DAX hit fresh record highs.

Gold bounced off its 50-DMA clean as a whistle for the second time this year and higher US yields don’t seem to be a problem...gold and bond markets are flagging something to equities but seeing the latter listening yet. 

Looking at big round numbers on bond markets as the next catalyst for equity markets. US Treasury yields continue to chop around with the 10-year treasury benchmark near the 4.50% level and the 30-year benchmark at 4.99% this morning after having failed to close above the 5.00% level the prior two days. The 2-year yield is similarly stuck near the round 4.00% level. Note that the US Treasury will auction 20-year treasuries today as the yield for that benchmark trades just north of the psychological 5.0% level this morning.

Meanwhile, Bitcoin trades at $107,780, just 1.7% below March record high of $109,699. Platinum has broken out - check some of the miners moving on this.

UK 

The FTSE 100 stumbled a bit early on Wednesday despite higher oil prices as it aims for a fifth straight day of gains. The blue chips rose 0.94% on Tuesday, marking its fourth straight day of gains, lifted by earnings optimism. Vodafone rose over 7% on its buyback plan, while Diploma jumped 15% on upbeat earnings and guidance. This morning the FTSE 100 was flat early doors at round the 8,781 mark with little uplift coming from the oil majors in spite of the jump in crude prices.  

Marks & Spencer fell after revealing a £300mn hit from the recent cyber attack. It’s got a £100mn of insurance cover, so this is not immaterial to the profit outlook. Full-year profit before tax and adjusting items up 22.2% at £875.5m, the highest in over 15 years. However, statutory PBT down 23.9% at £511.8m (2023/24: £672.5m); reflecting a £248.5m non-cash impairment of investment in its Ocado business. Breaking down by division, the Food business looks in good shape with sales up 8.7% to £9.0bn; adj. operating profit up about a quarter to £484.1m from £388.4m; with margin of 5.4%. Fashion, Home & Beauty sales were up 3.5% to £4.2bn; adj. operating profit ticked up to £475.3m from £437.5m); with margin of 11.2%. Dividend up 20% but costs of cyber attack weigh on shares near-term. The worry for investors is that this could drag on longer than management expect at the moment – not just direct impact but brand image and potential for consumers to go elsewhere (Next clear winner?). 

JD Sports shipped about 6% after confirming slower growth. Curry’s reported pre-tax profits of £162mn, up 37% YoY and £2m ahead of forecasts. The company finished the year with a cash balance of £180m, could be ready to resume dividend payments. Trading looks robust with group LFL sales growth accelerated to 4%. 

US 

The S&P 500 fell 0.39%, Nasdaq 100 -0.37%, and Dow -0.27%, as tech stocks led declines. Alphabet slipped 1.5% post-Google I/O, while Apple, Nvidia, and Meta were all lower. Tesla gained 0.5% after Musk confirmed his five-year CEO commitment.  Bulls looking a little tired right now - it's taken a bit longer than I thought but I do think the market is still way too complacent.

Elon Musk committed to leading Tesla for the next five years, assuaging some investors’ fears that he was retreating from a hands-on leadership role. The comments appear to crystallize what has been, by the evidence of the stock price, a ‘good news’ story for Tesla since the last earnings update in April, when Musk said he’d step back from government work. Investors had doubted Musk’s dedication to Tesla after he had become close to the Trump administration and taken a leading role in driving government efficiency efforts and spending cuts through the newly-minted DOGE – Department of Government Efficiency. 

In stepping back from politics to a greater or lesser degree, investors will be hopeful that a) Musk is more focused on the core Tesla issues like declining sales in key markets, increased competition, particularly in China, rolling out robotaxis, and reliance on EV credits, and b) improve the brand’s image again by taking some time out of the Trump limelight. 

But there is a lot of work to do, with sharp falls in sales in China and Europe in particular weighing on the outlook. Nevertheless, Musk seemed upbeat while speaking today in Qatar, saying that the business has “already turned around,” adding that “Europe is our weakest market” and that Tesla was “strong everywhere else”.

Tesla faces plenty of challenges, but investors appear to think Musk is the best person to lead the company. His remarks should draw a line under any further doubts whether he will remain in charge for the foreseeable future. 

Finally, to Klarna – if it looks like clever financial innovation sometimes just remember it’s actually just subprime lending. Buy-now, pay-later company Klarna – which lets you pay for your Deliveroo takeaway junk on a three-month credit plan – is surprise, surprise seeing losses widen. The firm said its net loss for the first three months of 2025 rose to $99 million, double the $47mn a year before. IPO plans remain on hold. 

Zoom and Snowflake report today.