Last week was a quiet one for markets. Global equities and bonds both ended the week little changed although gold rose 2.4% to $3340/oz. The Fed and Bank of England meetings were a big focus but in reality provided few surprises.
Within equities, the only notable area to see significant gains were UK small and mid-cap stocks which were up 1.5-2%. After a poor start to the year, these have outperformed large-cap recently helped by the rise of the pound. Their focus on the domestic economy means the stronger currency is a much smaller drag on small and mid-cap earnings than on the earnings of the FTSE 100 with their heavy overseas exposure.
Instead, the big news came this morning with the announcement that the talks over the weekend have led to China and the US agreeing to slash their tariffs for the next 90 days. European markets were up 1% or so this morning as a result.
The US will lower its tariffs from 145% to 30% while China will cut its tariffs from 125% to 10%. This is just the latest in a series of retreats by the US from the shockingly high tariffs announced in early April.
It is still far too soon to sound the all clear. Nonetheless, it now looks likely that while significant tariffs will remain in place longer term and cause a marked slowdown in growth, they are unlikely to be at such exorbitant rates as to push the US into recession later this year.
We now have a second key deadline for tariff negotiations, namely 10 August. The first date is 8 July when the 90-day reprieve for reciprocal tariffs comes to an end and it will become clear to what extent countries have been able to negotiate down their tariff rates.
The UK, however, is ahead of the game on this one with the announcement last week of a limited trade deal with the US. While this is good news, as was the conclusion of a trade deal with India, the resulting boost to UK GDP will be relatively small at no more than 0.1% or so.
In a sign that the 10% universal tariff imposed by the US on all countries is here to stay, this will remain in place for the UK even though it doesn’t run a trade surplus with the US. Instead, the main achievement was a reduction in the 25% tariffs imposed on cars, steel and aluminium.
Moving on from trade policy to monetary policy, the Fed last Wednesday kept rates unchanged at 4.25-4.5% and reiterated it was in no immediate hurry to change policy. It noted that the uncertainty had increased further and the risk of both higher unemployment and inflation had risen.
The Fed still looks likely to cut rates later this year by a further 0.5-0.75%, once the slowdown in the economy becomes more evident in the hard data, but now looks set to hold off easing for another couple of months.
As for the Bank of England, it lowered rates as anticipated by 0.25% to 4.25% and maintained the line that it would retain a gradual and careful approach to additional rate cuts. The surprise was more over the divergence of views on the committee – two members voting for no change, five for a 0.25% reduction and two for a 0.5% cut.
As in the US, rates look set to be reduced another 0.5-0.75% by year-end with the extent of the decline clouded by the uncertainty over the outlook and the competing pressures from above-target inflation and weak growth. The BOE lowered both its growth and inflation projections and is now forecasting growth and inflation of 1.3% and 2.4% over the coming year.
This coming week, US inflation data on Tuesday and retail sales and consumer confidence numbers on Thursday/Friday will be pored over for the tariff-related impact. Here in the UK, labour market numbers on Tuesday and GDP data on Thursday will be the focus.
Rupert Thompson – Chief Economist