The Organisation for for Economic Co-operation and Development (OECD) growth forecasts released last week indicate that the global economy is set for its weakest growth spell since the Covid-19 pandemic. They have cited the headwind of the current trading environment as a key driver for this.
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US Equity Market:
Last Wednesday, the tariffs introduced by President Trump on both steel and aluminium imports doubled to 50%. Despite this, the UK market was able to avoid the increase as levies remained at 25% following the trade deal agreed in May.
On the whole, last week was a positive one for markets. The S&P 500 and NASDAQ closed the week up by 1.54% and 2.0% respectively.
UK Equity Market:
Last week, the UK’s Office for National Statistics (ONS) announced that there was a small mistake in the reported inflation figure for April, driven by incorrect tax data provided by another government department. This is a notable event for investors because inflation data is a key driver of movements in both currency and government bond markets, as well as the Bank of England’s policy rate decision. This also highlights the wider issues with economic data more generally.
This week, Chancellor Rachel Reeves will conduct her government’s spending review. Ahead of this, she has already promised to bring back winter fuel payments for some pensioners and to invest in a new railway line between Manchester and Liverpool. Despite growing doubts, she has also reiterated her commitment to her existing fiscal rules, as well as the government’s commitment not to raise the three biggest taxes that affect working people: income tax, VAT, and national insurance.
The FTSE 100 rose by 0.79% over the week, and sterling continues to trade around 1.35 to the US dollar.
Inflation, Interest Rates and Bond Markets:
The European Central Bank (ECB) decreased its benchmark interest rate by 0.25% last Thursday. The rate now stands at 2% having been cut eight times this year. ECB president Christine Lagarde commented that the easing cycle has ‘nearly concluded’ and traders are now pricing in only one more rate cut in the second half of 2025. The Euro rose 0.5% against the dollar following the announcement.
UK bond markets were relatively stable last week in the lead up to Labour’s Spending Review on the 11th June. The benchmark 10-year gilt yield was down 0.02% at the time of writing. The US 10-year Treasury Note yield is down 0.03% over the same period. As a reminder, bond yields move inversely to prices.
What’s on the horizon:
The US Bureau of Labor Statistics is scheduled to release May’s Consumer Price Index (CPI) data on Wednesday. The Federal Reserve has been under pressure from the US government to begin cutting interest rates, following the lead of their European counterparts. Lower than expected inflation figures could bolster the case for easing monetary policy; however, Fed chair Jay Powell has made it very clear that he is reluctant to act prematurely in these uncertain economic circumstances.
UK Chancellor Rachel Reeves will deliver the Spending Review on Wednesday. The Spending Review is a process where the UK government sets out its multi-year spending plans for public services, infrastructure, and departmental budgets. Government spending levels directly affect inflation expectations and so has the potential to influence the Bank of England’s monetary policy. Bond, equity, and currency markets are all sensitive to government spending levels and interest rates, making this event one that investors across various markets will be watching closely.
You can read our May asset returns review here: May review