• UK markets today at least got some distraction from the ongoing noise on the upcoming US tariffs with the UK February price data and the spring budget announced by UK Chancellor Reeves, including updated economic and fiscal forecasts from the Office of Budget Responsibility (OBR). February CPI at least gave some comfort. Headline CPI slowed more than expected at 0.4% M/M and 2.8% Y/Y (from 3.0%) as did core inflation (3.5% from 3.7%). At the same time, services inflation stayed elevated at 5.0%. This outcome rekindled some hope for the BOE to consider a additional rate cut at the May 8 meeting. The market raised chances for this to happen to 75% even as last week’s BOE minutes showed that only one MPC member already supported an additional step at that time. In its economic revision related to the spring fiscal update of the government, the OBR halved expected growth for this year to 1.0% before recovering to an average of 1.75% for the rest of the decade (1.9% next year). Inflation is expected to peak at 3.8% mid 2025, due to higher food and energy prices and persistently high wage growth, but should ‘rapidly’ return to the BoE target thereafter. The fiscal outlook also deteriorated, but OBR says that government policies, notably the direct savings from welfare reforms and the reduction in day-to-day departmental spending and the indirect boost to receipts from planning reforms, raise £14 billion in 2029-30, offsetting the underlying deterioration. The ‘combined’ market reaction to both the CPI data and Reeves’ spring budget can be considered as fairly constructive. The UK yield curve initially steepened after the CPI and before the budget (2-y -5.0 bps and 30-y -1.2 bps) but the curve flattened somewhat after its release. UK yields currently ease between 4.0 bps (2-y), 2.5 bps (10-y) and 5.0 bps (30-y). At least for now, the market doesn’t further question fiscal sustainability again. Still LT UK yield are holding near cycle top levels. The debate on BoE easing remains open. The OBR assessment of inflation returning to 2.0% next year at least doesn’t complicate the BoE framework. On FX markets, sterling declined after the CPI (both against USD and euro). USD strength currently prevails with cable trading near 1.289. EUR/GBP tested the 0.8375 area in morning trading. The reaction to the budget was limited. EUR/GBP pair trades near 0.836, mainly on a soft euro. • On other core markets, US and EMU interest rates again show a divergent pattern. The US yield curve steepens with yields trading from unchanged (2-y) tot +3.75 bps. US durable goods orders were solid (0.9% orders and shipments non-defense ex aircraft). EMU yields still are tentatively oriented south (German 2-y -2.3 bps, 30-y +0.5 bp). EUR/USD reversed an intraday dip near 1.077, but holds below the 1.08 mark. Equities mostly are trading in red (S&P 500 -0.35%, EuroStoxx 50 -0.78%).
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