8 May 2026: Labour’s losses approach 150 seats

With the results of the devolved assembly elections not yet declared, the Labour Party has suffered a significant loss of seats on local councils that held elections yesterday. The leader of Reform UK, Nigel Farage, whose party has so far gained 203 seats, is already calling the results a “historic shift.”

With most results likely to be declared later in the day, the election is proceeding as predicted so far.

The Deputy Leader of the Labour Party, Foreign Secretary David Lammy, has already felt compelled to support his leader, Sir Keir Starmer, telling reporters that “it is a long time until the next General Election and you do not change pilots halfway through the flight.”

Figures next week are likely to paint a relatively rosy picture for the UK economy in the first quarter. The trouble is that fewer and fewer people believe they genuinely reflect what is happening “on the ground”.

Bank of England officials are privately concerned that the data may be sending false signals, complicating the job of setting interest rates.

Private-sector forecasters are equally worried that the growth numbers don’t reflect reality, raising further awkward questions for a national statistics agency that data blunders have beset in recent years.

Data since the pandemic shows the economy growing healthily in the first and second quarters of the year before stalling or even contracting in the third and fourth. The suspicion is that the Office for National Statistics is struggling to adjust for shifts in spending habits.

“If recent history is any guide, the economy will slow markedly in the coming quarters, consistent with activity being frontloaded into the first three months of the year,” said Dan Hanson, chief UK economist at Bloomberg Economics. “We think one plausible explanation is that the seasonality in spending patterns has changed, which is creating gyrations in the quarterly figures.”

Bloomberg Economics expects next week’s gross domestic product publication to show growth of 0.6%, a sharp rebound from the previous quarter’s tepid 0.1% expansion. The BOE, meanwhile, is predicting 0.5%. Either way, it would be the fastest quarterly growth since the first three months of 2025, with the pickup driven by a surprise surge in February.

The most recent MPC vote on monetary policy resulted in an 8-1 decision to leave interest rates unchanged, with the Bank’s Chief Economist, the sole dissenter, voting for a hike.

Huw Pill has been quoted as saying that leaving rates unchanged is not a “passive choice”. While he accepts that the majority of his colleagues chose to leave rates unchanged, his voice will echo in investors’ minds as inflation continues to rise, possibly reaching 6% if the situation in the Gulf is not satisfactorily resolved.

He commented after the meeting, "Events in the Gulf have left the outlook for global energy prices elevated and more uncertain. That uncertainty is unlikely to dissipate soon, but it is nonetheless clear that higher energy prices constitute an inflationary shock to the UK economy. Second-round effects in price and wage-setting stemming from this shock have the potential to push UK inflation above the near-term in a persistent manner. Our scenarios illustrate how a stronger inflationary impulse may amplify second-round effects."

Yesterday, the pound lost all the ground it had gained the day before as markets came to terms with the realisation that a conclusion to the conflict in Iran is not as close as previously thought. It fell to a low of 1.3548 and closed at 1.3555.

Today will see the publication of the non-farm payroll data for April. This will be a welcome distraction for markets that have seen themselves whipsawed by news about the war in Iran.

On the surface, there are reasons to be cheerful. JOLTS data this week showed that hiring in March rose at the fastest pace in nearly six years. Initial weekly claims for unemployment benefits are the lowest since 1969, and the 4.3% unemployment rate is consistent with an economy at full employment.

While the consensus forecast for April non-farm payroll gains in a Reuters poll of economists is only 62,000, around a third of the 178,000 increase registered in March, economists also expect the unemployment rate to remain unchanged at 4.3%.

But this stability could be a mirage. The labour market is stuck in a "low hire, low fire" zone, or perhaps even "no hire, no fire". Net hiring has virtually ground to a halt, and the only reason the unemployment rate isn't rising is that the number of people looking for work has shrunk, largely thanks to the Trump administration's tough immigration policies.

As outgoing Federal Reserve Chair Jerome Powell said last week, it is "an unusual and uncomfortable kind of a balance." Recent Fed studies have shown that the so-called 'breakeven' level of job growth, required to keep the unemployment rate steady, is close to zero. Indeed, we could see some months with payroll declines of up to 100,000 this year, and that's with the economy growing at a healthy rate.

Amid all this is the lingering threat of AI. While policymakers have championed the technology's potential productivity benefits, they have also raised concerns about the threat it poses to jobs. If AI lives up to the hype and overtakes an ever-expanding array of functions, fewer workers will be needed, leading to a possible "fire, no hire" environment.

Federal Reserve Bank of Minneapolis President Neel Kashkari said the conflict in the Middle East has added uncertainty to the outlook for interest rates.

“Given the uncertainty around the Iran war, I actually don’t know what the future holds,” Kashkari said on Thursday at an event in Marquette, Michigan. “If the Strait of Hormuz is closed for an extended period of time, it may well be that the next move might need to be up in interest rates.”

Kashkari was one of three policymakers who dissented at last week’s meeting, opposing language suggesting the Fed’s next move was likely to be a rate cut. In an article published last week, he said he backed the decision to hold rates steady, but thought officials should signal that the next rate action could be either a cut or a hike, depending on what happens with the economy.

“We voted against the forward guidance because we just didn’t want to signal that the next move was likely down,” he said of the dissents at the event yesterday.

Meanwhile, one of his fellow dissenters, Cleveland Fed President Beth Hammack, told reporters she expects the Central Bank to keep interest rates steady for the foreseeable future as it navigates considerable uncertainty. "My outlook right now is that interest rates will be on hold for quite some time," with the length of the hold not yet clear, Hammack said in a radio interview.

The dollar index reacted positively to the falling risk appetite yesterday, rallying to a high of 98.28, where it closed.

European Central Bank Vice President, Luis de Guindos, advocates a gradual response to the current crisis, defends immigration, and has praised Christine Lagarde’s unifying role at the institution.

When he took over as vice president in 2018, Luis de Guindos, 66, faced what seemed to be the most uneventful term in the European Central Bank's history. “I thought we weren’t going to move interest rates, neither up nor down; they had been unchanged for a long time, and I thought they would stay that way,” he recalls.

Over his eight years in the post, however, the world has endured the pandemic and the resulting shutdown of the global economy; the worst surge in inflation in 40 years, followed by a sharp rise in interest rates; Russia’s invasion of Ukraine; trade shocks from the United States; and now the energy shock stemming from the conflict in the Middle East.

Arriving in the role as a confirmed hawk, de Guindos has mellowed over time and allowed the data to do most of the talking.

Meanwhile, another departing member of the ECB’s Governing Council, François Villeroy, agrees with his “older statesman colleague, cautioning against premature speculation about the timing of future interest rate hikes. Villeroy has been emphasising that the ECB must remain "data-driven, not date-driven".

He recently said that the ECB needs "a critical mass of data" before considering rate hikes, adding that any tightening would depend, above all, on signs that inflation is spreading beyond its initial drivers, particularly through underlying price pressures.

He noted that while the ECB's next move is "highly likely to be upwards", focusing on specific months, such as June, is premature. In a recent panel, he said that "there is no predetermined calendar" and that "our vigilance is first and foremost on the risk of persistence".

Villeroy has been one of the most "dovish" members lately, and his views stand in stark contrast to those of most other voters. He's also retiring in early June, so his remarks carry much less weight.

The market is pricing in a 71% chance of a rate hike in June and a total of 55 bps of tightening by year-end. The only things that could deter the ECB from hiking in June would be the reopening of the Strait of Hormuz and a significant drop in oil prices.

As the Eurozone moves gradually towards a period of stagflation, the Governing Council may well see “sitting on its hands” at voting times as the most positive move it can make.

The Euro “gave back” most of its gains from Wednesday as the U.S. and Iran continue to “dance around a solution to the conflict. The single currency fell to a low of 1.1722 and closed at 1.1725.

Have a great day!