Borrowing costs in the UK continue to rise

Do you want the good news or the bad news? The good news was that the monthly US services Purchasing Manager Survey exceeded expectations, and output growth across goods and services in the US was the strongest seen so far this year and according to S&P Global, who compiled the survey. The Composite PMI Output Index from the G4 economies, covering both goods and services, lifted from 51.2 in February to 52.0 in March. If one remembers, last month’s weaker-than-expected flash survey sparked the decline in US equities. Some slight encouragement for Ms Reeves ahead of later today, growth also accelerated in the UK, reaching a six-month high, and edged also higher in the eurozone. That’s where the good news starts to fizzle out, again, according to S&P, the survey’s Future Expectations Index provides a measure of business confidence. Business expectations fell on average across the combined goods and services economies in the G4 economies to their second lowest since November 2022. Anyway, overall, the release of the survey sparked something of a rally in US stocks on Monday.

The latest US Consumer Board Confidence Report is further evidence that the US consumer is flagging. Consumer sentiment dropped to a four-year low. Most are putting this weakness in consumers down to concerns about higher prices, and President Donald Trump’s escalating tariff war is stoking concerns. As a result, inflation expectations continue to rise, but as of yet, the US treasury market does not appear to be panicking. Two-year US treasury yields have been falling this year and remain just below 4%, from 4.25% at the start of the year. The ten-year yield is also lower than at the start of the year. If cracks appear in the US bond market, stocks will suffer further.

The same may not be said about the UK treasury market ahead of Ms Reeves’s spring statement today, as 10-year gilt yields head ever closer to 5%. Yields across the curve have been increasing this year. The main force of last October’s budget will come in April, with a £25bn rise in national insurance contributions and the scrapping of business rate relief. Primarily responsible for the OBR’s expected cut in growth this year from 2% to 1%. Leading to weaker expected tax revenues, and borrowing continues to rise, hence the rise in borrowing costs.

This morning, we had the latest CPI report ahead of today’s Spring Statement, which is expected to announce cuts to welfare benefits and an increase in defence spending. The CPI report consensus was for a slight drop in the headline rate, which was the case. The headline rate fell from 3% to 2.8%; the core rate fell to 3.5%. This is good news for Ms Reeves today, but will only be a blip in a rising trend.