Equities posted further gains last week with global markets up 1.2% in local currency terms and 1.8% in sterling terms. While global equities are now some 2% above their February high in local currency terms, they remain 3% below in sterling terms. Government bonds, meanwhile, were down slightly over the week.
Last week’s equity gains were led by the US which rose 2.4% in sterling terms. The positive performance was helped by the news on Thursday of a stronger than expected gain in US payrolls in June. The numbers showed the labour market remaining fairly resilient in the face of all the uncertainty over policy. The relatively reassuring picture was reinforced by a small rise in business confidence last month.
The firmer than expected data cemented the market’s view that the Fed is unlikely to start lowering rates again until September and led to it scaling back a little its expectations for rate cuts over the coming year.
The other big US news was that Congress finally passed Trump’s big, beautiful budget bill. This includes tax cuts estimated to cost some $4.5tn over the next decade (much of this just involves renewing tax cuts which are already in place and would otherwise have expired next year). These cuts will be offset by both spending reductions and probable annual revenue of as much as $300bn or more from tariffs.
Even so, the prospect is now for the US budget deficit to remain a high 6-7% of GDP for the foreseeable future and US public debt to be on a worrying upward trend. Concerns on this front should limit any benefit to longer-dated Treasuries from prospective Fed easing and could quite possibly trigger some renewed upward pressure on yields – particularly with the 10-year yield currently at 4.35%, well off the high touched in January of 4.7%.
Here in the UK, tears on the front bench prompted fears that Rachel Reeves was for the chop and led to a 0.2% spike higher in gilt yields. This followed Labour’s humiliating U-turn on welfare reform and was only reversed when Starmer rather late in the day reaffirmed the Chancellor’s job security. 10-year gilt yields ended the week up very slightly at 4.55%.
Market concerns relate to the growing hole Reeves faces in the Autumn Budget if she is to stick to the fiscal rules which she claims are non-negotiable. The recent policy U-turns have wiped out around £6bn of the current small £10bn headroom and a probable downgrade in the OBR’s economic growth forecast will very likely more than wipe out the rest.
Further spending cuts (unless put in for right at the end of the parliament) look off the table in light of recent events, leaving the Chancellor with the unpalatable options of tweaking the fiscal rules and/or raising taxes. The former looks quite possible despite Reeves’ claims to the contrary but would clearly carry some risk given the long shadow of Liz Truss and the skittishness of markets.
As for tax increases, Labour’s pre-election pledge not to raise any of the big taxes leaves Reeves with limited options although last October she still managed to raise taxes by £40bn. This time, the most likely measure seems to be to extend the freeze on income tax thresholds beyond 2028. Additional possibilities include unfreezing fuel duty, which has not been increased since 2011, cutting pension tax relief and equalising capital gains and income tax rates.
On a more positive note, last week saw a hefty upward revision to the UK business confidence numbers for June. These now show a decent rebound in sentiment over the last couple of months from the low touched in April.
This coming week, there is little data out (other than UK GDP numbers for May on Friday) and all the focus will be on tariffs. The 90-day reprieve on reciprocal tariffs comes to an end on 9 July and Trump will apparently start sending out letters today detailing the new tariffs for those countries yet to agree a trade deal.
Only the UK and Vietnam have recently reached agreements, but negotiations continue with many trading partners. True to form, Trump has now delayed again the implementation date of the new tariffs – this time to 1 August. It remains far from clear how much tariffs could end up being raised beyond the baseline 10% now in place, not that the equity markets seem remotely concerned about this – at least for now.
Rupert Thompson – Chief Economist