Summary

• Chancellor Rachel Reeves’ Spring Statement delivered spending cuts but offered little reassurance to markets, with the Office for Budget Responsibility (OBR) slashing UK growth forecasts to 1% for 2025 and warning of higher unemployment and inflation

• UK gilt yields remain uncomfortably high, trading at a 0.45% premium over US treasuries (4.70% vs 4.25%), with rising debt-servicing costs threatening voter priorities unless technical fixes are introduced

• Trump announced sweeping new tariffs, including a 25% levy on all imported vehicles and parts, set to take effect on ‘Liberation Day’ this Wednesday: the biggest tariff hike since World War II

• While critics warn of inflation risks, the administration argues the tariffs will boost domestic manufacturing, protect intellectual property, and fund tax cuts for blue-collar Americans

• Equity markets struggled last week, with US stocks down 1.5%, led by declines in Technology and Communication Services, while Consumer Staples and domestic auto manufacturers performed well

• In the eurozone, inflation is expected to slow to 2.2%, keeping the European Central Bank (ECB) on track for an April rate cut, with markets anticipating two more cuts this year, bringing policy rates to a neutral stance.

Market review

‘The vagabond rapping at your door’ – a Bob Dylan moment for the UK

Chancellor Rachel Reeves delivered a round of spending cuts in her first Spring Statement which offered little reassurance to markets amid fiscal concerns. The OBR added to the gloom, slashing its growth forecast for the UK to a feeble 1% for 2025 while also warning of higher unemployment and inflation. February’s slightly lower inflation print of 2.8% offered a glimmer of hope, keeping the prospect of a May rate cut alive, but the overall picture remains bleak. Rising costs in April, thanks to the increase in National Insurance, is expected to contribute to sustained inflation, keeping gilt yields uncomfortably high. UK gilts now trade with a significant premium over US treasuries – 0.45% on the 10-year yield (4.70% vs 4.25%).

The government’s fiscal headroom is perilously thin, and with gilt yields elevated and growth expectations low, markets are pushing for either higher taxes or deeper cuts at the Autumn Budget. There are technical mechanisms within the gilt market that could alleviate the pain; ending the Bank of England’s quantitative tightening would ease the supply burden and reduce the UK treasury’s losses on gilt sales. Similarly, exempting gilts from banks’ leverage ratios - metrics that measure a company’s debt levels relative to its equity, assets, or earnings - would boost demand. Without such technical fixes, rising debt-servicing costs will keep siphoning funds from voter priorities, leaving Labour with little more than wishful thinking. The ongoing fiscal predicament facing the UK did not stop UK equities from edging in a positive return last week outperforming turbulent global markets.

Trains, planes and automobile tariffs

Trump announced a fresh set of tariffs on Wednesday, including a 25% levy on all imported vehicles and parts, set to take effect on what he calls ‘Liberation Day’ this Wednesday. This marks the biggest tariff hike since World War II. While orthodox economists are quick to condemn tariffs, their arguments often feel one-sided and incomplete. The US is, in many cases, simply matching the protectionism of its trading partners, who have long maintained their own tariffs and, in some cases, stolen US intellectual property with little pushback.

The inflationary risks, however, are very real. The potential for a spike in used car prices is drawing comparisons to the wave of inflation that helped sink Biden’s administration. Consumers, facing higher prices on imported vehicles, may flood the used car market, driving up prices. Still, the current administration’s strategy appears to be one of risk before reward, betting that the longer-term benefits of these trade terms will outweigh the short-term pain bringing back manufacturing to the US and supporting blue collar Americans.

In the near term, equity markets are feeling the strain, with the US market down 1.5% last week. The selloff was led by Technology and Communication Services, while Consumer Staples held up well. Notably, auto manufacturers and retailers, the sectors most directly affected, outperformed in the US but performed very poorly in other regions, reflecting expectations that domestic producers will benefit from the protectionist stance.

The week ahead

Tuesday: Eurozone inflation

Our thoughts: Annual inflation is expected to slow marginally to 2.2%, reinforcing the case for a rate cut by the ECB in April. With inflation pressures easing, the central bank is likely to lower its policy rate to just one cut away from the perceived neutral level of around 2%. Markets anticipate two more cuts this year, which would bring rates in line with the ECB’s neutral stance.

Wednesday: ‘Liberation Day’ tariffs

Our thoughts: President Trump is set to announce sweeping new tariff measures aiming to charge trading partners the same as they charge the US. There are reports that 15 countries, mostly in Asia, will be the main target. These countries are responsible for 75% of US imports and impose aggressive tariffs themselves. The administration expects the tariffs to raise significant revenue, funding tax cuts while bringing back manufacturing jobs for blue-collar Americans.