Goldman Mark Down Yield Forecasts

Late on Friday Goldman Sachs wrote “over recent weeks, our economists have revised lower their inflation forecasts and pulled forward their policy rate forecasts in the UK. Indeed, they expect the strong correlation between UK and Euro area inflation given the impact of energy prices will lead to a sustained disinflation.”

• “Recent wage data and ongoing sogginess in growth corroborates the view.”
• “We now expect earlier and faster BoE easing, starting in June and proceeding in cuts of 25bp per meeting.”
• “As a result, we revise our 2y and 10y Gilt forecasts to 3.50% and 3.75% respectively (from 3.75% and 4.00% previously).”
• “While BoE commentary remained hawkish going into and at last week’s MPC, and UK rates remain sensitive to developments out of the US, we continue to see value in longs at the very front-end of the UK curve.”
• “In particular, as we have argued in recent weeks, given the momentum in global disinflation and shifting messaging from the Fed, we think markets can price more BoE easing, in particular in the second half of 2024.”
• “We still think the UK curve will steepen however and expect the potential for further fiscal loosening to limit the ability of gilts to rally much below 3.50%, as well as keeping asset swaps on a tightening path.”