Morning from Madrid!

Some things are certain in life. In the end Real Madrid always wins and the UK always lags the US economy. On the big stories in macro right now, is the re-acceleration of the UK economy both in growth- and inflation terms. Various price surveys have re-accelerated amidst what appears to be a decent cyclical uptick in the economy.

This is starting to look- and sound somewhat reminiscent of the US economy in Q4-2023 and if the BoE moves the needle further towards cuts rhetorically, we risk seeing the same melt-up psychology in GBP assets as we saw in USD assets in Q4-2023.

With only one member of the MPC voting for a cut in March (Dhingra), we are unlikely to see more cutting votes today as internal members of the committee typically back up Bailey. Broadbent, who would be the next “obvious candidate” to support a cut, is unlikely to vote against the (internal) party line.  We see directional GBP payers as a strong case into H2, but have decided not to add positions ahead of the BoE.

Chart 1: UK inflation is accelerating