The week that was …
Economic round-up
Spring Statement
Chancellor Rachel Reeves gave her Spring Statement response to the updated economic and fiscal forecasts from the Office for Budget Responsibility. She said her fiscal rules were ‘non-negotiable’, instead choosing to cut spending to restore her £9.9bn fiscal headroom. Read more in ‘In focus’ below and from the BBC here
UK inflation
UK inflation fell more than expected in February, after a drop in clothing and shoe prices. The Consumer Price Index dropped to 2.8%, down from 3% in February, according to the Office for National Statistics (ONS). Read more from the BBC here
UK PMI
The latest S&P Global Flash UK PMI survey showed business activity in the private sector gaining momentum in March, driven by the fastest upturn in the service economy since August 2024. Manufacturing, however, experienced severe headwinds from rising global economic uncertainty and potential US tariffs. The index registered 52.0 in March, up from 50.5 in February.
US PMI
Growth in US business activity picked up momentum in March, with a marked upturn in the service sector offsetting a renewed fall in manufacturing output. Business expectations for the year ahead fell to their second-lowest level since October 2022, however, as companies worried over customer demand and tariff policy from the new administration.
US consumer confidence
The US Conference Board’s Consumer Confidence index dropped from 98.3 to 92.9 – significantly below expectations and its worst reading since February 2021. Views of current business and job market conditions also slipped. Read more from FX Street here
German business confidence
Germany’s Ifo business confidence reading rose in March, as companies expect an economic recovery. The Ifo institute said its business climate index stood at 86.7 in March, up from 85.3 in February. This was in line with the forecasts of analysts polled by Reuters. Read more from Reuters here
UK retail sales
UK retail sales rose 1% in February, propelled by an increase in spending on clothing and household goods. This was ahead of consensus expectations, and marked the second month of expansion. Read more from the FT here
US consumption
The Personal Consumption Expenditures (PCE) price index – the US Federal Reserve’s preferred inflation gauge – increased 0.3% in February after advancing by an unrevised 0.3% in January. Core inflation proved particularly stubborn. Read more in ‘In focus’ below and from MSN here
Markets round-up
Gilt markets
Gilt markets were stable following the Chancellor’s Spring Statement. The Debt Management Office said it planned to issue £299.2bn of government bonds in the 2025/26 financial year – slightly less than markets had expected. Read more in ‘In focus’ below and from Reuters here
Global equities
Global equity funds attracted large inflows early in the week, as investors grew more optimistic president Donald Trump’s administration would apply tariffs more selectively. Investors bought a net $35.43bn (£27.38bn) in global equity funds during the week – after some $29.49bn worth of net sales in the prior week – data from LSEG Lipper showed. Read more from Reuters here
Carmakers slide
Share prices for the world’s biggest carmakers slumped after president Trump said he would impose 25% tariffs on imports of cars and parts. Read more from the Times here
“Overall, we continue to have a positive view on UK government bonds - because of the yields available, the fact so much fiscal bad news is already priced in and, more than anything, because we expect the UK economy to weaken.
Selected equity and bond markets: 21/03/25 to 28/03/25
| Market | 21/03/25 (Close) |
28/03/25 (Close) |
Gain/loss |
|---|---|---|---|
| FTSE All-Share | 4667 | 4671 | +0.10% |
| S&P500 | 5668 | 5581 | -1.50% |
| MSCI World | 3690 | 3635 | -1.50% |
| CNBC Magnificent Seven | 295.4 | 289.0 | -2.20% |
| US 10-year treasury (yield) | 4.26% | 4.24% | |
| UK 10-year gilt (yield) | 4.72% | 4.71% |
Investment round-up
Fidelity launches stablecoin
Fidelity Investments is planning to launch its own stablecoin, as the group extends its push into digital assets. The group said it was in the advanced stages of testing its token, which is designed to act as cash in cryptocurrency markets and will be managed through its digital assets arm. Read more from the FT here
AIC updates ‘dividend heroes’ list
Foresight Solar and Patria Private Equity are the newest entrants to the AIC’s ‘next generation’ dividend heroes list of trusts that have increased their dividends for 10 years or more. Half of the ‘dividend heroes’ list have increased their dividends for 50 or more consecutive years. Read more from the AIC here
Jupiter multi-manager co-founder departs
Algy Smith-Maxwell, one of the founders of the Jupiter Merlin fund of funds range, is to retire next quarter, leaving John Chatfeild-Roberts as the last co-founder still at the group. Smith-Maxwell wants to focus on growing the audience for his investment podcast.
River Road launches US large cap value fund
US-based River Road Asset Management is launching a US large cap value fund to UK investors in collaboration with Boutique Capital Partners. The CG River Road US Large Cap Value Select fund initially launched in the US on 1 November 2014 and is currently $950m in size.
Price leaves Fidelity
Nick Price, manager of the £195m Fidelity Japan trust and Fidelity Japan Growth fund, is set to retire at the end of the year after more than 30 years with the firm. Price joined Fidelity’s Tokyo office in 1993 as a research analyst.
… and the week that will be
‘Liberation Day’
2 April will be ‘Liberation Day’, when Donald Trump plans a significant escalation of his tariff policies – or as the US president put it himself: “For DECADES we have been ripped off and abused by every nation in the World, both friend and foe. Now it is finally time for the Good Ol’ USA to get some of that MONEY, and RESPECT, BACK. GOD BLESS AMERICA!!!” This is likely to create volatility across financial markets as companies and sectors discover just who is in the firing line. Read more from the FT here
Chinese data
While all the focus has been on the activity emerging from the White House, China has been quietly undergoing an economic revival. A series of stimulus packages have boosted growth, which has been reflected in stronger stockmarket performance. PMI data this week is should confirm whether the recovery is firmly established. Read more from CNBC here
The week in numbers
China PMI (March): Consensus expectations are for a rise to 50.5 from 50.2 for manufacturing, and to 50.5 from 50.4 for non-manufacturing.
China Caixin manufacturing PMI (March): Consensus expectations are for the index to fall to 50.7 from 50.8. China Caixin services
PMI (March): Consensus expectations are for the index to fall to 51.3 from 51.4.
Eurozone inflation (March): Prices are forecast to rise to 2.1% from 2.3% year on year, and to 0.6% from 0.4% in February. Core inflation is expected to hold at 2.6% year on year.
UK construction PMI (March): Consensus expectations are for the index to rise to 45.1 from 44.6.
US non-farm payrolls (March): Payrolls are expected to grow by 80,000, down from the growth of 151,000 seen in February. The unemployment rate is expected to hold at 4.1%.
Company news: Full-year results expected from Raspberry Pi and Travis Perkins. Read more from IG here
In focus: Gilts complex
Rachel Reeves’s key success measure for last week’s Spring Statement was not how it was received by the public or her party, but the response of the gilt market. With a vast debt burden and tight fiscal rules, this particular beast holds enormous sway over Treasury decision-making and any signs of discontent would have forced the chancellor back to her spreadsheets. The early signs suggest she has done enough to shore up gilt market confidence but the longer-term outlook appears more uncertain.
The gilt market responded positively to news that gilt issuance would be marginally lower than expected. “The UK Debt Management Office is set to issue £299.2bn of gilts over the 25/26 financial year – slightly less than market expectations of £304bn, according to a Reuters poll,” says Johnathan Owen, a portfolio manager at TwentyFour Asset Management.
“The split of the issuance was also key in determining how supply would affect the rates curve: 37% will come from short-dated, 30% from medium-maturity and 13% from long-dated Gilts, with an additional 10% from index-linked bonds and 9% still ‘TBC’. This release pointed to a heavy skew to shorter maturities compared to last year – and more so than the market was expecting.”
For his part, Bryn Jones, manager of the Rathbone Ethical Bond fund, highlights that the long-dated gilt issuance represents a major reduction. “Short issuance had been at 31.8% – already an all-time high – and has now been increased to 37.1%,” he continues. “In the short term, this might have a positive impact on the gilt curve before longer-term structural themes play out.”
Owen notes gilt markets have tentatively welcomed Reeves’s plan, adding: “Following more encouraging gilt issuance plans for the long end, the curve flattened, with the 30-year yield rallying by 6 basis points (bps), the 10-year by 3bps and the two-year by 1bp.” The 10-year government bond yield is meanwhile hovering at around 4.7% – far higher than the 4.1% level of last October, but lower than the 4.9% level it hit in January.
While the outlook for gilts appears stable for now, the chancellor’s very cramped fiscal headroom of £9.9bn could be eliminated in an instant. “A 0.6 percentage point increase in bank rate and gilt-yield expectations across the forecast would eliminate current balance headroom,” observes the Office for Budget Responsibility. “And if global trade disputes escalate to include 20 percentage point rises in tariffs between the USA and the rest of the world, this could reduce UK GDP by a peak of 1% and reduce the current surplus in the target year to almost zero.”
The market is overwhelmed by the regular increase in market-borrowing requirements. The deterioration in UK public finances cannot be underestimated.”
To be fair, the opposite scenario is also plausible, with the gilt market currently pricing in a relatively gloomy scenario on interest rates. “Markets are currently pricing in a 77% chance of a 25bp cut at the Bank of England’s May meeting but with a further cut not coming until February 2026,” says TwentyFour’s Owen. “This reflects the market’s caution around second-round pricing effects from one-off price hikes, which may halt further cuts in 2025.”
Bond managers are split on whether this assumption on interest rates is too pessimistic. “Overall, we continue to have a positive view on UK government bonds,” says James Athey, co-manager on the Marlborough Global Bond fund. “This is because of the yields available, the fact so much fiscal bad news is already priced in and, more than anything, because we expect the UK economy to weaken. That is likely to lead to lower inflation and lower interest rates, which we expect to be positive for bonds.” Owen agrees that gilts could outperform if a weakening economy and labour market spur additional easing.
That said, the opposite scenario is just as likely – where gilts underperform as a result of sticky wage inflation or rising bills. For that reason, Owen says he is struggling to build significant conviction on gilts, adding: “We maintain a cautious stance on gilts until clearer signals emerge from the labour market and broader economy.”
Vikram Aggarwal, a fixed income investment manager at Jupiter, agrees the current interest rate expectations in the gilt market look out of step with other developed economies. “Pricing in the gilt market implies the highest interest rates at the end of the current cycle compared to any other major developed market economies, including the US,” he points out. “This seems incongruous given the UK’s relatively weaker economic growth outlook and its vulnerabilities, such as an expensive housing market.”
Aggarwal believes this may not translate into lower yields, though, adding: “One might be tempted to say the gilt market seems ‘cheap’ and an attractive buy. This ‘cheapness’ has, however, persisted for many months – or even years – and the market is overwhelmed by the regular increase in market-borrowing requirements. The deterioration in UK public finances cannot be underestimated.”
Another problem for gilts is that global bond issuance is vast. The US has an annual re-funding requirement of around $4tn, for example, while Germany is to support its new defence and infrastructure spending through government bond issuance. Against this backdrop, global bond investors may simply overlook the UK market as ‘too difficult’ and turn to other bond markets.
The pervading view may be that UK government debt look cheap, and implied levels of interest rates are too high, but this may not be enough to tempt investors back to gilts, given the well-flagged uncertainties surrounding the UK economy. As a result, the Chancellor’s fiscal headroom continues to look precarious.
Read more on this from Axa here, from Goldman Sachs here and from ING here
In focus: Consumption concerns
The US PCE [Personal Consumption Expenditure] reading is the Federal Reserve’s favoured inflation gauge and is likely to have a bearing on its next interest rate decision. In this month’s reading, headline inflation remained unchanged at 2.5%, but there was a negative surprise from core inflation, which reaccelerated to 2.8% in February. With the prospect of further tariffs on the horizon, there are risks of more price increases. Rate cuts are becoming less likely with each round of data.
The 0.4% increase for the month was the biggest gain since January 2024. The strongest rises were in recreational goods and vehicles, which rose 0.5%, with overall goods prices increasing by 0.2%. Services prices also rose 0.4%. The gains were offset by a fall in gasoline prices, which dropped 0.8%.
Even so, the bond market still appears untroubled by these apparent inflationary pressures. The US 10-year bond yield continues to fall. It now stands at 4.2%, down from 4.4% on Thursday and 1.9% lower on the week.
“The rise in core inflation hides two different stories: durable goods are in deflation, while services inflation is rising and remains close to 2.5%,” explains Christophe Boucher, chief investment officer at ABN AMRO Investment Solutions. “Given the differences in rate sensitivity between services and goods, this may raise questions about the need for the Fed to maintain rates at these levels.”
“Markets appear overly pessimistic. While tariffs do pose an inflationary risk, it is likely to be temporary and largely independent of the Fed’s monetary policy. Beyond the tariff expectation, inflation is not slowing as quickly as expected, which suggests the Fed is likely to remain ‘on hold’ for now.”
Although spending data continues to fall, income figures continue to surprise to the upside, Boucher maintains, and this is likely to support strong consumption once consumer confidence picks up again. The past week saw the Bureau of Economic Analysis report a rise in consumer spending of 0.4% for the month – below the 0.5% forecast – and yet consumer confidence measures continue to drop.
“The real downside risk,” Boucher concludes, “would come from a sustained loss of confidence among businesses and consumers that is strong enough to meaningfully impact consumption and investment over the longer term.”
