12 June 2026: Gilt yields hold near May highs as inflation concerns intensify

Sir Keir Starmer’s Cabinet lost another Minister yesterday, the sixth since the former Health Secretary Wes Streeting resigned a month ago. John Healey’s resignation as Defence Secretary may be the most damaging yet, as he was deeply critical in his letter to the Prime Minister of cuts to the defence budget that could leave the country vulnerable to attack amid heightened global tensions.

Later yesterday, the Armed Forces Minister, Al Cairns, a junior Minister subordinate to Healey, also resigned following a dispute over military funding.

Keir Starmer’s Government is falling apart in real time. John Healey, long regarded as a loyalist, has clearly concluded that he can no longer serve this Prime Minister.

Whether it is the failure to uphold international law, stop the boats, or the open division at the heart of government, the pattern is clear. Keir Starmer has lost control.

Healey’s resignation turns a long-simmering argument over the Defence Investment Plan into a full-blown crisis for Sir Keir Starmer's Government. Starmer has committed to publishing the plan before a Nato summit next month, after months of bitter negotiations between the Ministry of Defence and Rachel Reeves' Treasury.

In his letter to the Prime Minister, Healey wrote: 'The excellent and extensive cross-government work completed in January, overseen by you, me and the Chancellor, confirmed the scale of the challenge and the rising demands on defence. Since then, you have been unable, and the Treasury has been unwilling, to commit the resources the nation needs to defend the country amid rising threats.

Irrespective of whether Manchester Mayor Andy Burnham wins the Makerfield by-election, which takes place in less than a week, even Starmer will realise that his time as Leader is coming to an end.

The Leader of the Opposition commented, “I told the Prime Minister that the money he planned to allocate to defence was less than half the minimum that the armed forces required. He insisted that wasn’t the case. Now the PM’s Defence Secretary has resigned because he agrees with me.”

The latest data for the month-on-month change in GDP is due to be published this morning. Britain’s economy is expected to show signs of the impact of the Iran war when official figures for April are released, with forecasts for a sharp pullback after a surprisingly strong start to the year.

The figures from the Office for National Statistics are set to show the beginnings of a squeeze on households after the conflict sent fuel prices surging, with most economists pencilling in a 0.1% decline in output in April, a marked reversal from the 0.3% growth seen in March. However, some fear the number could be significantly worse.

Retail figures for April have already revealed that sales fell at their fastest rate for almost a year, down 1.3%, as soaring petrol and diesel prices hit fuel sales and demand for clothing waned.

Traders were disinclined to take positions yesterday, preferring to wait for today’s data. Sterling had a mildly firmer session yesterday, ending the day slightly stronger against the US dollar and broadly steady against most major currencies. The day’s moves were modest, but the tone was marginally positive for sterling. It challenged its recent high of 1.3433 before closing at 1.3416.

While unrest in the Middle East and optimism about artificial intelligence continue to drive markets, the Federal Reserve’s first policy meeting under a new chair has largely flown under the radar. The relatively limited discussion of this important change has largely focused on President Trump’s demands that rates be lowered amid more persistent inflation.

Trump recently told reporters that he “loves the inflation.” However, this transition may have longer-term implications for markets.

At his Senate confirmation hearing, Kevin Warsh advocated structural changes to the Central Bank's monetary policy management. His stated aims include reducing the size of the Fed’s nearly $7trn balance sheet and eliminating the dot plot and other forms of forward guidance. In the long term, I think these measures would have the unintended consequence of increasing both implied and realised market volatility.

The Fed’s post-global financial crisis monetary policy, which has included large-scale quantitative easing, has been particularly effective in reducing volatility. The market believes the Federal Reserve will step in to support financial markets, usually by cutting interest rates or adding liquidity, whenever asset prices fall sharply. It’s not an official policy but a widely held expectation shaped by decades of Fed behaviour.

While other market-structure changes have also contributed to lower volatility, the Fed and other global Central Banks have been the main drivers.

A Fed effort to further reduce its balance sheet, following the end of its latest quantitative tightening programme in late 2025, should prompt the market to rethink longstanding expectations of falling volatility.

Withdrawal of forward guidance, including the dot plot, would have the same effect by obscuring the Fed’s monetary policy outlook and widening the range of possibilities.

While by no means perfect, the dot plot helps to lower expectations of extreme outcomes.

Warsh’s desire to shrink the balance sheet also runs counter to one of the Trump administration’s goals: keeping interest rates as low as possible. We saw the administration’s sensitivity to higher Treasury yields in its reaction to ‘liberation day’, when it later removed its punitively high tariffs.

GDP growth was disappointing in the final quarter of 2025 and the first three months of this year, but business surveys suggest a re-acceleration is underway. This view is supported by a recent string of better-than-expected jobs reports and the obvious point that a surge in oil prices is a boon for an energy sector that is willing and able to export.

Tech capex related to the AI story continues to drive business investment, with no slowdown in sight, as evidenced by chip orders.

Meanwhile, consumer spending by high-income households continues apace.

With energy prices pushing inflation above 4%, talk of potential Federal Reserve interest rate hikes has understandably increased, as FOMC members openly tell the markets of their concerns over the second-round effects of price increases.

Jobless claims rose modestly last week but remain at a historically low level despite economic headwinds from the war in Iran.

The number of Americans filing for unemployment benefits for the week ending June 6 rose by 4,000 to 229,000, the Labour Department reported yesterday. That’s the highest since early February, before the U.S. and Israel launched attacks on Iran, but it is still considered a healthy level. It's also more than the 216,000 new applications forecast by FactSet-surveyed analysts.

Weekly filings for unemployment benefits are considered a proxy for U.S. layoffs and a near real-time indicator of the health of the job market.

Despite concerns that the conflict in the Middle East could further squeeze an already upbeat labour market, hiring has picked up in recent months following a miserable 2025 that saw fewer than 200,000 job gains. By comparison, about 1.5 million jobs were added in 2024.

The Dollar Index fell to around 99.60 yesterday, closing near the bottom of its daily range, marking a moderate risk‑on, dollar‑softer session. It eventually closed at 99.69.

Yesterday, the European Central Bank pulled the only lever it has to combat rising inflation, hiking interest rates for the first time in more than two years, in a move that was so telegraphed that even people living under a rock had predicted it.

Eurozone inflation has been well above the Central Bank’s 2% target, so this hike was something of a no-brainer given the Governing Council’s generally hawkish stance. The hike raised rates by a quarter of a percentage point, bringing its main policy rate to 2.25%. That makes Europe the first of the G7 advanced economies to lift rates in response to the war in Iran.

The ECB isn’t exactly optimistic about the bloc’s growth prospects. Naturally, it raised inflation estimates for this year to 3% from 2.6% and for next year to 2.3% from 2%. But that’s not all: it also cut growth forecasts by 0.1% for both years.

This might’ve been the first hike in a while, but it probably won’t be the last: markets are expecting two more this year.

Europe’s getting hit with a double-whammy.

Inflation is rising, hitting 3.2% in May, well above the 1.9% in February, but economic growth is losing steam. So the ECB had to choose between supporting the economy by holding rates or tackling inflation by raising them.

It was no surprise that it chose the latter. The ECB doesn’t publish voting results, but there was likely a significant majority in favour of the hike.

Any recent dovish comments have been drowned out by the hawks, who are never afraid to make their views known.

However, European Central Bank policymakers see keeping interest rates on hold at their next meeting in July as the more likely scenario if energy prices remain near their current level.

Reuters reported that two sources at the meeting said a pause at the ECB's next gathering on July 22 was more likely than a hike for now, provided there was no sudden and large swing in energy prices.

One source said it would take a new surge in oil prices to more than $100 a barrel for Brent crude to trigger a rate rise in July, given that second-round effects on the prices of other goods and services have been absent so far.

Another said that another unexpected jump in core inflation could also trigger a move.

However, both sources noted that ECB projections incorporated two more rate hikes, so even if policymakers paused in July, they could still act later, possibly in September, without a material improvement in the inflation profile.

An ECB spokesperson declined to comment.

The Euro was broadly stable to slightly firmer in markets yesterday, with only modest moves across major currency pairs. The data shows a quiet, low-volatility session, with EUR drifting marginally higher against the U.S. dollar and holding steady against most other majors. The common currency reached a high of 1.1590 and closed at 1.1578.

Have a great day!