We assess the macro drivers of the UK outlook – in terms of aggregate demand, both domestic and foreign, aggregate supply and BoE monetary policy – as judged by financial markets. Our results suggest that monetary policy has been the dominant factor shaping UK asset prices since the start of the year.

We identify the source of macro shocks as perceived by financial markets using daily data based on the joint movement of Sterling asset prices (2-year swap rates, trade-weighted Sterling, 5y5y inflation forwards and equity prices).

Our results also shed light on the market’s interpretation of specific events, such as the release of weak Q1 GDP data… Weak Q1 GDP data were viewed as primarily a negative demand shock. The market’s reaction on the day of the release was also symptomatic of further ‘dovish’ monetary policy news.

In last week’s policy statement, the BoE reiterated its view that weak Q1 GDP data would prove “largely temporary.” Chief Economist Haldane joined two External MPC members in voting for an immediate rate rise. On our estimates, the market reaction incorporated a hawkish monetary policy shock in 2-year swap rates while the market also inferred slightly stronger demand from the BoE’s communication. This suggests there may be some – albeit limited – scope for central banks to influence market pricing by shaping market expectations of the economy as well as by communicating their likely reactions in a given economic environment.