UK bond yields on track for biggest weekly decline in two years
The yield on UK bonds are now on track for their biggest weekly decline since 2024, as a raft of gloomy economic data this week has meant investors are paring back their expectations of higher interest rates from the Bank of England.
The yield on the 10-year gilt has fallen 0.26 percentage points this week to 4.9%, after official figures showed this week that inflation slowed to 2.8% in April, the lowest rate in more than a year.
The fall was partly down to Ofgem’s lower energy price cap, which reduced the typical annual dual-fuel bill in Great Britain to £1,641 from April – a fall of £117. Electricity prices dropped 8.4% in April, the ONS said.
Concerns are also unwinding around the impact of a possible Labour leadership challenge from Andy Burnham, the Manchester mayor who has reiterated his commitment to the government’s self-imposed borrowing.
Kallum Pickering, chief economist at the broker Peel Hunt, says it is “increasingly hard to square incoming UK data pointing to an economy which is rapidly losing pressure” with the idea that the Bank of England may need to tighten to help protect the economy from the impact of the Iran war.
UK finances look vulnerable to a host of threats, including evidence of cooling momentum, rising interest rates, and the risk of even more planned borrowing in case Prime Minister Keir Starmer is ousted and replaced by a more left-wing alternative.
Key events
UK consumer confidence rises despite Middle East uncertainty, poll says
It is a fragile economic backdrop in the UK, but GfK’s consumer confidence index suggests that UK consumer confidence rose in May.
The index — a measure of how people view their personal finances and broader economic prospects — rose two points from the previous month to -23 in May. Economists polled by Reuters had expected confidence to fall to -28.
However, its major purchase index dropped two points -20, four points below May last year.
Neil Bellamy, consumer insights director at GfK, said:
Consumers appear to be in a more generous mood in May, with a two-point increase in the headline score and improving perceptions of both personal finances and the wider economy.
In contrast, there is a drop in major purchase intentions, with this measure down two points to -20 in May, its lowest level since January 2025.
Key income groups are recording more worrying major purchase scores. For those earning £14,500 to £24,999, for example, the May score is -33, a 19-point fall below the -14 seen in April.
Similarly, there is also a steep fall within the average household income group (£35,000 to £49,999), with a 10-point drop from -17 to -27.
…Moreover, our savings measure – down by the unusually high amount of 10 points – suggests people are diverting funds from savings accounts to pay for day-to-day expenses. Inflation may have fallen in April, but with price pressures expected to rise again and continued uncertainty around interest rates, it’s unlikely May marks the beginning of a sustained improvement.”
Oil prices rise as US-Iran tensions continue
Oil is on the up this morning. Brent crude, the international benchmark for oil prices, has risen by 3.3% to $105.92 a barrel.
Kathleen Brooks, of the broker XTB, says the market is still holding out hope that there will be a resolution to the war in the Middle East.
The market continues to think that a deal between the US and Iran is likely, even if we have had mixed messages from both sides. The US has said that a deal is near, but Iran cannot have a nuclear weapon, whereas, Iran has said that it wants to keep its uranium stores. From a trading perspective, it is best to ignore the noise and rhetoric from both sides and concentrate on the numbers.
Lower oil prices and bond yields can keep stocks supported in the short term, even if the longer-term outlook depends on the full reopening of the Strait of Hormuz.
EU suspends customs duties on fertiliser imports
Lisa O’Carroll
The EU has suspended customs duties on imports of fertiliser due to price spikes in the wake of the US and Israel war on Iran.
The Council of the EU, representing member states, said on Friday however that the duty free imports would not apply to Russia or its ally Belarus on account of the war in Ukraine.
Duties, which currently range between 5.5% and 6.5%, will also be suspended on imports of urea and ammonia, key ingredients in the manufacture of fertiliser.
Makis Keravnos, finance minister of Cyprus, which currently holds the EU presidency, said:
Today’s decision gives European farmers better access to affordable, reliable fertiliser supplies – good news for the agriculture sector and EU consumers alike. At the same time, we are accelerating away from Russian and Belarusian products and building more resilient supply chains and partnerships globally.
The world’s largest supplier of fertiliser is the Norwegian based Yara which has plants across Europe. It recently raised concerns that while Europe could probably tolerate price rises, poorer nations in Africa were at risk.
Games Workshop is the best performer in the FTSE 100 this morning, with its shares up almost 3% after saying that it expects core revenue for the year ended in May of at least £625m, compared with £565m last year, and pre-tax profit of at least £265m.
BT is another riser, with its shares up 2.9% after the company said yesterday it has increased its target for cost savings to £3.7bn and said it was extending its restructuring programme by a year to the end of March 2030.
Reuters also reported yesterday that Indian conglomerate Bharti Enterprises is seeking to increase its stake in BT to just under the threshold that would require it to make a full takeover offer for the telecoms group.
A Bharti spokesman told Reuters that the company was pleased with its current 24.95% shareholding and “currently has no plans to increase its stake.”
Bank boss apologises for calling staff ‘lower-value human capital’
The boss of Standard Chartered has apologised for saying that AI would replace “lower-value human capital”, after his comments triggered a severe backlash this week.
On Tuesday, the London-headquartered lender outlined plans to cut more than 7,000 jobs over the next four years as it increasingly uses AI.
He said:
It’s not cost-cutting. It’s replacing in some cases lower-value human capital with the financial capital and the investment capital we’re putting in.
This morning he posted on LinkedIn that he recognised his “choice of words” has “caused upset to some colleagues.”
In a separate earlier post however, he appeared to defend his comments, noting that the bank has for many years invested in staff whose roles have been disrupted by automation.
In that context, I said that lower-value roles are more vulnerable to automation, and that we have a responsibility to help colleagues move into higher-value roles.
…We will continue to speak honestly about the impact of technological change, and we will continue to act responsibly in helping our people to adapt and succeed.
UK bond yields dip despite higher borrowing figures
UK gilt yields are falling this morning, as investors digest the latest public borrowing figures against a fragile economic backdrop.
The yield on the 10-year gilt is down 0.04 percentage points to 4.93%, while the two-year gilt is down 0.02 percentage points to 4.34%.
It comes as investors pare back their expectations of interest rate rises, amid fears around high unemployment and the prospect of higher inflation this year.
European stocks have also opened broadly higher this morning, with the UK’s blue chip FTSE 100 index up 0.3%. The Stoxx Europe 600, which tracks the biggest companies on the continent, is up 0.7%.
‘Our fiscal rules are working,’ business secretary says
Business secretary Peter Kyle is now defending the government’s economic record on BBC Radio 4’s Today programme, after official figures showed public sector net borrowing – the difference between government spending and income – was £24.3bn in April 2026, £4.9bn higher than in April 2025.
He says:
Inflation has just fallen, growth is to the top of the G7. I think you’ll find our fiscal rules are having a positive impact on the fundamentals of our economy right now.
He adds that Rachel Reeves is “acutely aware” of high borrow costs that “stem back to the mini-budget and Liz Truss experiment”.
It is very hard as a country… to get a grip back on our reputation around the world. Because the bond markets are global, they’re not just domestic and they’re looking at us compared to other countries, and it takes a long time to get a grip back on the reputation.
Estée Lauder and Puig end merger talks to create $40bn beauty giant
US cosmetics group Estée Lauder and Spanish perfumery Puig have ended merger talks that would have created a $40bn beauty giant.
Estée Lauder said on Thursday that “the parties have terminated discussions regarding a potential business combination”.
The merger would have combined Estée Lauder’s portfolio of beauty brands, including Clinique and Tom Ford Beauty, with Puig’s Charlotte Tilbury and Jean Paul Gaultier in one group.
However, there were concerns among investors that a deal could have stretched the company’s balance sheet and distract from its turnaround plan. Shares in in Estée rose by more than 10% in after hours trading on Thursday.
Estée chief executive Stephane de La Faverie said in a statement:
We have one of the most powerful portfolios of prestige beauty brands in the world … and we believe we are uniquely positioned to drive sustainable long-term growth globally.
British shoppers likely to keep spending less, retail body says
The British Retail Consortium has reacted to official retail figures this morning, which showed a drop last month.
Harvir Dhillon, economist at the industry body, said:
We are starting to see signs that concerns over the Middle East conflict and its impact on living costs are leading shoppers to rein in their spending in many areas.
…Discretionary spend is likely to drop further as the cost of living squeeze worsens. To protect consumers and support economic growth in the months ahead, government should avoid further inflationary pressures through domestic policy costs. It can start by cutting non-commodity energy charges, which include the taxes and levies that account for two thirds of retailers’ energy bills, and addressing the triple packaging tax that affects all retailers and their supply chains.”
However, Susannah Streeter, of the broker Wealth Club, notes there are some signs the mood is a little less downbeat than feared.
There’s been a tentative improvement in the closely watched GfK index, though it remains deep in negative territory, rising to -23 in May from -25 in April. Many households, though, have been forced to dip into cash stashes to deal with rising prices, with the savings gauge plunging. Emergency pots will only last so long, and once more bills start to rise, there could be a fresh tightening of spending ahead.
Thomas Pugh, chief economist at the audit, tax and consulting firm RSM UK, says public finances are “only likley to get worse”.
It now looks inevitable that government borrowing will soar past the £115.5bn that the OBR expected for this financial year back in March. Indeed, a weaker economy, rising unemployment rate, soaring gilt yields and some additional fiscal support for households and businesses will combine to push borrowing significantly higher this year. We have pencilled in an additional £20bn to £30bn of borrowing this year.
What’s more, if gilt yields remain around current levels through to the next budget, the chancellor will probably lose around £10bn of headroom in 2029/30 against her fiscal rules. That doesn’t preclude a larger bailout now – as long as it is temporary. Instead, the real constraint on borrowing is financial markets. With 10-year gilt yields already above 5% and the budget deficit above 4%, the UK is entering the crisis in a precarious fiscal position.
That tough fiscal picture will remain the same for whoever ends up in Downing Street later this year. The government is facing serious fiscal pressure from the war in Iran. The risk is that a sharp increase in borrowing, and borrowing costs, this year means a bigger adjustment is needed by the end of the decade to stick to the fiscal rules.”
Pantheon Macroeconomics has estimated that debt interest costs in 2026/27 will be about £15bn higher than assumed in the budget if gilt yields hold at current levels for the rest of the year.
Chief economist Rob Woods said:
Headroom against the fiscal rules would be cut by closer to £10B if half the rise in yields since the Budget is sustained until 2029/20. As best we can tell, political risk has added 20-to-40bp to gilt yields and we suspect will keep borrowing costs more elevated than they otherwise would be this year. Either a more left-leaning Prime Minister will take over, or the current PM will shift further leftwards. Granted, Mr. Burnham will stick to the fiscal rules. But doing so could be hard given the government’s unpopularity, and in any case tax hikes to fund spending plans could undermine growth and worsen the fiscal arithmetic.
Introduction: UK borrowing hits £24.3bn in April; retail sales drop as Iran war weighs on confidence
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
UK government borrowing hit its second-highest level for April on record, as pressure on public finances continues to grow.
There was a £24.3bn deficit in the UK’s finances last month, official figures showed on Friday.
A poll of economists by Reuters had suggested there would be a £20.9bn deficit for the month.
It will be unwelcome news for the chancellor Rachel Reeves, as the government braces for the full effect of the energy shock in the Middle East and grapples with uncertainty around Keir Starmer’s leadership.
Grant Fitzner, chief economist at the Office for National Statistics, said:
Borrowing this month was substantially higher than in April last year and although receipts increased compared with April 2025, this was more than offset by higher spending on benefits and other costs.
Borrowing for the latest full financial year was revised down slightly, and on a comparable basis remains the lowest since the year ending March 2020.
Lucy Rigby, chief secretary to the Treasury, said:
Earlier this week the IMF agreed we had the right economic plan to reduce the deficit.
We are cutting borrowing and debt – with our actions reducing government borrowing by over £20bn last year – while driving growth through £120bn of additional capital investment over the parliament.
Working families have benefited from falls in inflation and cuts to interest rates – and our non-negotiable fiscal rules will be all the more important to continue to protect them as we face the consequences of the war that we have played no part in.
The ONS has also published new figures for retail sales this morning, which showed a 1.3% drop in volumes in April, as more people cut back on their fuel purchases. That compares with an expected fall of 0.6%, according to Reuters.
Fitzner said:
After strong growth last month, motor fuel sales fell in April, with evidence suggesting motorists were conserving fuel after stocking up in March.
These subdued fuel purchases contributed to a sizeable monthly fall for total retail sales in April.
Fuel sales were down 10% in the month, the ONS found. Retail sales excluding fuel declined 0.4% on the month, down across all categories apart from food, where there was a 0.9% rise.
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