Leading Indicators | BoE weighs tariff risks amid resilient growth and soft labour data
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The divergence of swap rates and gilt yields amid market volatility
The recent widening of the (negative) spread between UK swap rates and government bond yields reflects heightened uncertainty and a global sovereign bond sell-off, including gilts, which has pushed yields higher. In contrast, expectations for rate cuts have helped temper upward pressure on swap rates. Currently, the spread between the 10-year SONIA swap rate and the 10-year gilt yield stands at -54bps. While the negative spread reflects financial market volatility, the absence of a similar rise in swap rates is relatively supportive for borrowers.
Manufacturing surge drives strong UK GDP growth in February
UK GDP rose by +0.5% m/m in February, marking the strongest growth in nearly a year and outperforming economists’ expectations of a +0.1% increase. The rebound follows flat growth in January and was supported in part by a +2.2% rise in manufacturing output, as exports to the US reached their highest level since late 2022. Whilst the UK economy is on course for a positive first quarter, uncertainty from the rise in US tariffs remain.
Labour market softness likely to encourage BoE to maintain current rate-cutting path
The UK unemployment rate remained unchanged at 4.4% in the three months to February. Private sector wage growth, a key indicator watched by the Bank of England (BoE) for indications of a tight labour market, held steady at 5.9%, staying on course to come in below the BoE’s 6.2% forecast for the first quarter. Markets are now pricing in a rate cut in May, with expectations for two further reductions by the end of the year.
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