Global equities last week unwound the modest gains of the previous week, falling 1.3% and 1.7% in local currency and sterling terms respectively. This left markets up just over 1% on their mid-March low but they are down around 1% this morning.
Once again, bonds were little changed and gold the star performer – the gold price rose 2.3% over the week and this morning broke above $3100/oz. Central bank buying is a major support but tariff-related uncertainty is also behind the rise as well as the recent declines in equities.
This Wednesday has been proclaimed ‘Liberation Day’ by President Trump and will see the announcement of his plans for reciprocal tariffs. These are intended to compensate not only for other countries’ tariffs but also their non-trade barriers, including taxes such as VAT.
The range and size of the tariff increases remains quite uncertain, not least because of the complexity of the issue and the sheer difficulty in assessing the appropriate tariff for differing goods/countries. That said, the tariff hikes are looking likely to be significantly higher than was generally expected a couple of months ago.
Indeed, Trump jumped the gun last week, announcing a 25% tariff on auto imports. This had been trailed for a while and was no big surprise and echoed the 25% tariff on steel and aluminium imports announced a couple of weeks ago. However, Trump is also now threatening a secondary 25% tariff on any country buying Russian oil, if no truce in Ukraine is agreed, as well on anyone buying Venezuelan oil.
As with all his proclamations on tariffs, it is impossible to know whether and for how long they will actually be implemented. But tariffs do look set to impose a significant drag on US growth, both as a result of the hikes themselves and all the uncertainty caused by the policy flip-flopping. The latter is already taking its toll with the US economy on track to record little growth in the first quarter.
The hit to US growth over the coming year looks likely to be of the order of 1% or so depending on the size of the tariff hikes. However, we continue to believe a fall into recession is unlikely. The economy proved unexpectedly resilient to Fed jacking up rates in 2022. And with the consumer and the corporate sector still in pretty good shape, it is well placed to withstand the self-harm now being inflicted.
Tariffs will also boost US inflation at least temporarily and Friday’s numbers showed the Fed’s favoured core measure unexpectedly edging up to 2.8% in February. Even so, the market still thinks the Fed will cut rates by another 0.75% later this year which looks a bit optimistic unless growth tanks.
If the economy does avoid a recession, equities usually regain their losses after a 10% correction within 6-12 months. This time, the recovery might take a bit longer and could be a choppy process due to continued policy uncertainty. But the key point for longer term investors is that we do not expect current events to derail the underlying bull market.
Rachel Reeves did her best to dominate the headlines in the UK last week. But even here, Trump was not far away with the UK desperately trying to secure a reprieve from the auto tariffs before they take effect on Wednesday.
The Spring fiscal statement was a fairly depressing affair but contained no major surprises. The OBR cut its growth forecast for this year from 2% to 1% into line with the consensus. And the Chancellor announced £14bn of spending cuts to restore the previous £10bn leeway versus her fiscal rules, which had been wiped out by the deterioration in growth and rise in borrowing costs.
Her actions failed to stem expectations that tax increases may still be required in the autumn given the uncertainties over growth and her relatively small safety margin over the fiscal rules. Still, gilt yields ended the week unchanged and the UK was the only major equity market to record a small gain last week, possibly buoyed by some better than expected news on the economy.
UK business confidence unexpectedly perked up in March to a six-month high and retail sales posted a large gain in February for the second month running. Inflation also fell a bit more than anticipated last month with the headline and core rates declining to 2.8% and 3.5% respectively.
This coming week, ‘Liberation Day’ on Wednesday will be the big focus. But US payrolls on Friday will also be a centre of attention to see how much damage tariff uncertainty and government lay-offs are causing.
Rupert Thompson – Chief Economist