Closing post
Time to wrap up…
The Bank of England is in no rush to raise interest rates while the outcome of the Iran war remains uncertain and the UK’s growth rate stays weak, the governor, Andrew Bailey, has said.
In a signal that borrowing costs will remain at 3.75% at least during the summer, Bailey said it was tolerable for inflation to stay above the Bank’s 2% target during the current crisis. However, that would change if a more permanent increase in prices began to take effect, he said.
“Given the context of softness in the real economy and uncertainty around the scale and duration of the shock, tolerating temporarily above-target inflation to provide some support for the real economy is an appropriate way to approach the trade-off [between inflation and activity],” Bailey said.
“But that tolerance would weaken if signs of second-round effects begin to emerge.”
Oil prices fell on Friday as investors hoped for an end to the US-Israel war on Iran, leaving the commodity poised for one of the biggest monthly declines ever.
The price of Brent crude futures, the global benchmark, fell by 1.3% to $91.54 and is nearing a fall of 17% since the start of May.
The price of futures for West Texas Intermediate, the North American benchmark, fell by 1.4% on Friday morning to $87.64 a barrel. That was down 7% from the peak earlier this week of $94.70.
The optimism came after Donald Trump circulated a draft peace agreement for the war in Iran among allies.
Asda has agreed a deal to update its online grocery store and home deliveries from next year using technology from Ocado.
Ocado software will be used to support Asda’s grocery website and deliveries from its stores and “dark stores” – smaller warehouses that are not open to the public – from early 2027, the companies announced on Friday.
Asda, Britain’s third largest supermarket, will also use Ocado’s underlying technology to manage deliveries of orders placed through apps such as Uber Eats, Deliveroo and Just Eat, and for click-and-collect services through the supermarket’s website and apps.
The deal means Ocado will soon provide the technology supporting deliveries at three of the UK’s biggest grocers.
Government urged to push water companies to carry less debt
The government has been urged to push water companies to carry less debt after South East Water became the latest supplier to breach the terms of its operating licence.
South East Water lost one of its two investment-grade ratings from Moody’s Investors Service on Thursday. Regulator Ofwat requires two investment-grade ratings as a sign of financial stability and to prevent companies from running up unsustainable debts.
The downgrade came in the same week that 22,000 people in Kent suffered from water outages. South East Water asked households to only use water for essential purposes because of the hot weather in an effort to preserve supplies.
Mike Martin, the Liberal Democrat MP for Tunbridge Wells, said:
The news that South East Water’s debt has been downgraded to junk, whilst there are water outages all over Kent is deeply concerning, but not surprising. This is the product of decades of poor leadership and the taking on of too much debt by the company.
Fundamental reform is urgently needed – and that includes the debt levels that water firms carry. The government needs to be less timid and act to protect taxpayers and customers from this type of financial mismanagement.
South East came under intense pressure earlier this year after major outages. Chief executive David Hinton and board chair Chris Train both resigned this month after MPs heavily criticised their leadership during the crisis.
The ratings downgrades mean South East will have to engage with Ofwat over a possible turnaround regime to try to get its debt burden under control.
Cat Hobbs, founder of We Own It, a campaign group, said environment secretary Emma Reynolds should put South East Water into special administration and then nationalise it. She said:
It’s completely disgraceful that the government is allowing this desperate situation to happen yet again. This is a company that prioritises making a profit for shareholders in Australia and Canada instead of investing in the necessary infrastructure to keep the taps running. 9 out of 10 countries run water in public ownership, England is an ideological outlier and the experiment has failed.
Shockingly, almost unbelievably, South East Water’s licence requires a 25 year notice period to end the contract - unless they fail in their statutory duties. Fail is exactly what they have done so the government must use this chance to take back this essential resource and natural monopoly.
US stock market opens higher
US stock markets are keeping up their winning streak, with the blue chip S&P 500 opening 0.4% higher. The tech heavy Nasdaq index is up 0.3%.
In London, the FTSE 100 is now down slightly by 0.06%.
Kallum Pickering, chief economist at the broker Peel Hunt, notes that expectations around how interest rates will move have changed dramatically since the start of the war in the Middle East.
Before the war, when oil prices were $65 per barrel and UK inflation appeared on track to settle at the [Bank of England’s]s 2% target, money markets bet that the Bank would be able to cut the Bank Rate twice this year, in two 25bp increments from 3.75% to 3.25%. At the height of the fighting in mid-March, when oil prices peaked at around $115 per barrel, money markets saw the BoE hiking three times this year.
Now, as hopes of a deal rise and oil prices trend lower, money markets are reducing the number of rate hikes they expect. At the time of writing, the oil price is $92 per barrel and money markets anticipate 1.3 hikes this year – that is, one full hike and a 30% chance of a second. Markets are currently priced for the BoE to hold at the next two meetings in June and July, before being odds-on to hike in October.
Oil prices are still falling, with Brent crude now down 1.8% to $92.06 a barrel.
But Kathleen Brooks, of the broker XTB, notes that we are heading toward yet another weekend without a formal agreement between the Iran and the US to end the war.
The prospect of a resolution has been dangled all week, but according to the US vice president, there are still several sticking points to work out before an agreement can be reached.
…The oil price is also tumbling back towards $90 a barrel for Brent crude. The oil price is down a further 2% today, bringing its weekly decline to 12%.
When the oil price falls this sharply, some stocks are virtually guaranteed to rise. Overall, May has been a good month for stocks and a bad month for the oil price. UK bonds have been the major outperformers in the sovereign debt space this month, and UK 10-year yields are down 25bps, and 30-year yields are lower by 27bps.
This suggests two things: firstly, Andy Burnham’s recent commitment to the UK’s fiscal rules is placating the market, secondly, inflation fears, rather than political fears, are the dominant threat to UK gilts. If the oil price falls, then inflation fears abate, which boosts the attractiveness of UK government debt.
If the market is already pricing in an end to the war in the Middle East, then what other themes could drive markets? The key theme for June will be central banks and what they do next.
Updated
Italy's economic growth revised higher
Italy’s economy grew more than first estimated at the start of the year, according to its national statistics office.
Italian GDP rose 0.3% in the first three months of the year, instead of an initial estimate of 0.2%.
Ankita Amajuri, an economist at Pantheon Macroeconomics, says:
The detail shows that the pick-up in growth was led by households’ demand, with growth in households’ consumption picking up to 0.5% quarter-to-quarter, from 0.1% in Q4 last year.
Otherwise on the domestic front, government spending was flat, after having grown 0.2% on the quarter previously. Fixed asset investment, meanwhile, grew by 0.7% on the quarter—weaker than 1.0% quarterly growth in Q4 2025, but still relatively strong overall.
However, she notes that forecasts suggest there will be weaker growth in the second quarter of the year as the energy shock triggered by the war in the Middle East affects people’s disposable incomes.
Higher energy prices will also constrain output in the manufacturing sector.
Admittedly, fiscal support being provided to households through the energy shock so far will help soften the blow to consumption, but we expect to see weaker growth in household spending this quarter nevertheless. Furthermore, any boost to growth from recent reforms to Italy’s energy market—which aim to bring Italian natural gas prices in line with the Dutch TTF benchmark— will be more than reversed by the energy shock.
Italy’s economy is more vulnerable to the recent surge in energy prices than Spain’s—which has a large stock of renewables, and France’s—which has vast nuclear energy infrastructure.
Coming up to midday, the pound has fallen slightly against the dollar, down 0.2% to $1.3413.
Gilt yields are also dipping, with the yield on the two-year down by about two basis points lower to 4.228%.
Gold is up today by 1% to $4,539 an ounce, but the metal is still on track for its third monthly drop in a row amid concerns around inflation.
The metal is seen by investors as a safe haven during periods of volatility, but higher inflation has fed expectations of higher interest rates. Gold becomes relatively less appealing when rates are high, as it does not pay a yield.
Updated
Above target inflation 'appropriate' given Middle East uncertainty, BoE governor says
The governor of the Bank of England has said the bank is “tolerating temporarily above target inflation” to support the economy given the impact of the conflict in the Middle East.
Andrew Bailey, in the text of a speech he is due to deliver at the Reykjavik 2026 economic conference, said:
Given the context of softness in the real economy and uncertainty around the scale and duration of the shock, tolerating temporarily above target inflation to provide some support for the real economy is an appropriate way to approach the trade-off.
But that tolerance would weaken if signs of second-round effects begin to emerge.
The BoE’s monetary policy committee (MPC) last kept interest rates on hold on 30 April.
Bailey also reiterated his comments that the BoE had tightened monetary policy by taking expected rate cuts off the table “and that is already affecting the economy.”
Key quoted rates on mortgages have increased since the onset of the conflict. The decision to hold reflected a judgement that continued weakness in the UK activity and the labour market is likely to lessen the strength of second-round effects from higher energy prices, while recognising that these effects are likely to be stronger, the larger and more persistent is the rise in global energy prices.
…We have to monitor the situation in the Middle East and how it affects the UK economy and inflation very closely and adjust policy as required.
The market is now pricing in one quarter-point rate hike by the Bank of England in November.
Updated
Retailer shares fall after Deutsche Bank downgrades
Shares in some of the UK’s biggest retailers, including Dunelm and Wickes, are falling this morning after analysts at Deutsche Bank cut their ratings on the stocks.
The bank’s analysts are warning that demand could dry up from lower-income consumers amid higher inflation, especially on big ticket purchases.
They note that UK GDP forecasts have been consistently cut for the past two years, and that economists now expect real UK GDP growth of just 0.9% in 2026.
They said:
The UK is relatively exposed to energy shocks given its limited domestic supply and reliance on natural gas in heating and electricity generation. CPI is expected to average 3.1% over the year (from 2.1% previously) as higher commodity prices impact imports and second round pressures feed through supply chains and the wider economy.
With the ‘cost of living crisis’ still relatively fresh in consumers minds (especially as the majority of price increases never actually reversed) this will likely lead to a contraction in spending. In the short term many consumers will have benefited from an April pay rise hitting the bank accounts but this will erode as the year progresses and price increases follow a different cadence from income increases.
The bank has downgraded its view on B&M and Wickes to “sell”, and Currys and Dunelm to “hold”. The shares are down 1.5%, 2.3%m 2.1% and 3.4% respectively.
Inflation in France rises at fastest pace since 2024
Inflation in France accelerated at the fastest pace level in two years in May, feeding expectations that the European Central Bank could raise interest rates.
Consumer prices rose 2.8% from a year ago in May. Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, noted that French energy prices rose by 16.8% , following a 14.3% rise in April. He said:
Overall, these data highlight that consumers in France are now exposed to a much more severe inflation shock than elsewhere in the major EZ economies, depressing consumer sentiment.
…Elsewhere in France, consumers’ spending slipped at the start of Q2, and GDP growth for Q1 was revised down by 0.1pp, to -0.1%, adding to the recent negative shift in the French macro data, highlighted by the May surveys.
The fall in consumers’ spending, ex-services, was brought down by a plunge in energy consumption. Spending on diesel and petrol was pulled lower by higher prices, depressing volumes, while spending on electricity consumption remained subdued due to exceptionally warm weather.
Core spending, meanwhile, was stronger, rising by 0.2% after a 1.7% increase in March. Rising spending on clothing and in “other goods” offset declines in durables, including autos.
Meanwhile in Spain, the inflation reading for May came in at 3.6%, broadly in line with what economists had been expecting but also ahead of the ECB’s 2% target.
There will be more economic data out of Europe later today, as the ECB weighs how much the conflict in the Middle East is affecting inflation.
Ocado software to be used in Asda home deliveries from next year
Closer to home this morning, Asda has secured a deal with Ocado to use the company’s software for all home deliveries starting next year.
Ocado software will be used in the supermarket’s deliveries from stores and “dark stores” – smaller warehouses that are not open to the public – from early 2027, the companies said in an announcement on Friday.
Asda will also use Ocado’s platform to deliver orders placed through other apps such as Uber Eats, Deliveroo, and Just Eat, and for click and collect orders.
Shares in Ocado are up by about 14% this morning.
Read my colleague Jasper Jolly’s full story here:
Updated
European stock markets open higher
Stock markets in Europe have opened higher this morning, amid cautious optimism that the US and Iran are on the verge of securing a 60-day truce renewal.
The UK’s blue chip FTSE 100 index has opened up about 0.1% higher this morning. The Stoxx Europe 600 is up 0.3%.
Mohit Kumar, of the broker Jefferies, explains that a US-Iran deal could have a greater impact on investors’ expectations for interest rate movements this year than in the stock market.
In terms of market reactions if a deal is agreed upon, we should see another leg higher in risky assets and lower in rates. However, positioning suggest that the rates market should see a greater reaction than equities.
For equities, we are still bullish, but believe that the easy part of the rally is behind us. S&P positioning has reached just above 5, while Eurostoxx is at +2.2. Positioning is not extended yet, but beyond the relief reaction of a deal, we do not see a massive move higher from these levels. European equities can get a boost higher in the near term simply because positioning is much less crowded than in the US.
For rates, positioning is on the short side, with [US Treasuries] positioning just below -4 and Bunds close to -3. The recent rally in rates has led to some short covering in both US and Europe, but we still see more room to go. Our view remains that the front end of Europe, UK and the US are still mispriced. For the ECB, we can see one hike (in June), simply because they have to justify their inflation credibility. However, we do not see a series of rates hikes and maintain our long position at the front end of the curve.
For Fed and the BoE, we maintain the view that the next move would be a cut and not a hike. Markets have repriced in the UK with only 35bp of hikes priced for this year and less than 2 hikes till terminal. Our view remains that the BoE would be taking rates towards 3% by middle of next year and keep our long position at the front end of the curve.
For the Fed, we do not see a Warsh Fed delivering any hikes. For us, the question is when and not if there will be a cut. From a fundamental perspective, we would argue that near term inflation would be high and hence will be difficult for Warsh to deliver a rate cut before mid-terms. But there is a political element, and eventually it would depend on how soon oil prices drop below $80 and central banks start treating the latest oil price shock as a transitory effect on inflation rather than leading to second round effects. Our base case remains one of 2 rate cuts over the next 12 months.
Oil on track for one of its biggest monthly drops ever
Brent crude, the international benchmark for oil, is heading towards one of its biggest monthly drops ever as it nears a fall of 17% since the start of May.
The market is hopeful that a US-Iran deal, which would extend the ceasefire by 60 days and reopen the strait of Hormuz, will materialise.
Jim Reid of Deutsche Bank notes that the details will be important, but that “US Treasury Secretary Bessent said that Trump’s three ‘red lines’ for a deal are for Iran to open the Strait of Hormuz, turn over its enriched uranium and end its nuclear program. And Bessent also posted earlier in the day that the US would ‘not tolerate any effort to impose a tolling system in the Strait of Hormuz.’”
Whilst the geopolitical headlines provided the main boost to markets yesterday, they got further support after the latest US PCE inflation print was softer than expected, easing concern around the need for rate hikes. The release showed that headline PCE was only up +0.4% in April (vs. +0.5% expected), whilst core PCE was up +0.2% (vs. +0.3% expected). So that led investors to dial back expectations for a Fed rate hike, with the probability of a hike by December down to 59% by the close, having been at 62% the previous day.
Fed officials also didn’t sound in a rush to hike either, with NY Fed President Williams saying that monetary policy “is right where we want it to be”. Admittedly, there was discussion of a hike, with St Louis Fed President Musalem acknowledging there “there is a scenario where the economy might require a rate increase”, but that was still conditional.
Introduction: Asian stocks rise and oil price slips amid hopes of US-Iran peace deal
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Asian stocks are rising today amid hopes of a US-Iran peace deal and the re-opening of the strait of Hormuz.
US president Donald Trump has circulated a draft peace agreement for the war with Iran among allies including Israel.
The draft is similar to the one that has been circulating around the Middle East, under which the strait of Hormuz would be opened to commercial shipping, the US blockade of Iranian ports would be lifted and Iran would be given access to as much as $12bn (£9bn) in frozen assets.
The aim would be for commercial shipping in the strait to return to pre-war levels within 30 days. Negotiations are expected to last as long as 60 days on the future of Iran’s nuclear programme.
Stocks are rising strongly in Asia, with the Japanese Nikkei up 2.65%, Hong Kong’s Hang Seng up 0.9% and the South Korean Kospi up 3.6%.
Some of the rally in Asia is being supported by enthusiasm for AI – shares in the chip making giant TSMC are up 2.6%, while Samsung Electronics and SK Hynix are up 6% and 0.6%, respectively.
The oil price has also slipped this morning. Brent crude, the international benchmark, is down by about 1% to $93.02 a barrel as investors weigh the impact of the potential reopening of the strait of Hormuz.
The agenda
7.45am BST: French inflation report
8.am BST: Spanish inflation report
9.20am BST: Andrew Bailey speech at the Reykjavik 2026 economic conference
1pm BST: Germany inflation report
1.30pm BST: Canadian Q1 2026 GDP
