Last Wednesday Chancellor Rachel Reeves made her spending review announcement. Increases in funding for important areas like the NHS and national defence were announced. To help fund these increases, budgets were cut for departments such as the Home Office, Foreign Office, Department for Transport, and the Department for Environment, Food and Rural Affairs.
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US Equity Market:
Last Tuesday, President Trump announced that the US and China reached a new trade agreement after two days of talks. This is good news for investors, who will hope that the deal holds and reduces the uncertainty in financial markets. This follows the agreement made between the UK and the US last month which is due to be signed later this week. Tariffs will be lowered on British car exports in exchange for greater access to the UK market for US beef and ethanol producers.
The US inflation print for May revealed that US inflation rose slightly to 2.4% up from 2.3% in April. This figure was lower than analyst expectations, indicating that the recent global trade tensions haven’t inflicted significant upward pressure on prices yet.
Markets response to the news was quite muted, with the S&P 500 and NASDAQ closing the week marginally down by 0.36% and 0.58% respectively.
UK Equity Market:
Official figures released last Thursday revealed that the UK economy suffered a 0.3% contraction over April. The decline in gross domestic product (GDP) was partly driven by a large decrease in exports, due to the uncertainty surrounding tariffs in the current economic environment. This is the largest monthly contraction since October 2023, and is another harsh reminder of the current UK growth problem.
UK unemployment rose to 4.6% in the three months to April, a four-year high. This increase comes after the introduction of higher payroll taxes and the recently increased minimum wage.
The FTSE 100 was marginally positive (+ 0.16%) over the week, and sterling contines to trade around 1.35 against the dollar.
Inflation, Interest Rates and Bond Markets:
Following the news of the decline in UK GDP, markets are now pricing in a higher likelihood of two more interest rate cuts this year, a move that could help boost economic growth.
The European Central Bank (ECB) signalled last week that it might be close to the end of its interest rate cutting cycle. Having cut rates 8 times in the past 12 months, the Euro is now trading around $1.16, the highest level since November 2021.
What’s on the horizon:
This week, the Bank of England, the Federal Reserve and the Bank of Japan are all set to announce their interest rate decisions. While all three central banks are widely expected to keep rates unchanged, investors will be closely watching the subsequent statements for insights into their economic outlooks, particularly regarding key indicators such as inflation and unemployment rates.
The Swiss Federal Statistical Office recently reported the first decline in consumer prices since March 2021. The Swiss National Bank (SNB), which considers price stability to be annual inflation between 0% and 2%, will meet on Thursday, where it is expected to cut its policy rate from 0.25% to 0%. Financial markets are now anticipating consecutive interest rate cuts, with projections suggesting the SNB could reintroduce negative interest rates by September.