Monday Digest
Posted 10 February 2025
Up and down and on and off
The week began with, potentially, a very distasteful pill to swallow. Trump announced another 10% of tariffs on China and new 25% tariffs on Mexico and Canada, the US’ closest and single largest trading partners.
Markets fell on the news but without a sense of panic and then turned, following a pause in the tariff introduction to March after Mexico and Canada offered concessions on border control. China, announced countermeasures but limited to minor imports.
This first bout of tariff bullying looked extreme, such as the 25% levies on Mexico and Canada, but will likely reduce if a deal can be stuck – take what Trump announces seriously, but not literally.’
Analysts predict further tariffs of 10% on China, with Canada and Mexico’s tariffs dependent on a renegotiated USMCA (US-Mexico-Canada Agreement), probably concluding sometime next year, dependent on Trump’s assessment of delivery on his agenda.
Tariffs look to be inevitably for the EU too, especially on vehicles. The UK might escape levies, because the US actually has a trade surplus, rather than deficit with us.
Analysts are split: Goldman Sachs predict a 0.5% rise in US inflation without significant growth impacts, however, the US Tax Foundation looks to Trump’s first term where tariffs reduced US GDP by 0.2%, and employment by 142,000 jobs. Potentially larger tariffs and higher consumer prices could complicate the Federal Reserve’s ability to cut rates further.
Despite all the noise, markets ended the week broadly flat, with non-Trump news having more impact.
All of the Magnificent 7 except for Nvidia have reported earnings and investors seem to be disappointed with the results. DeepSeek has made investors more sceptical that AI dominance needs enormous investment that only the largest companies can deliver. However, US big tech disappointment was offset by US mid-cap and smaller-cap companies that are finally showing some earnings growth.
Away from the US, the Bank of England’s announced a welcome rate cut, taking the Base Rate from 4.75% down to 4.5%. Fears remain over falling near term growth and inflation and if correct, the economy is on a weaker path and a small rate cut will not create much benefit.
Still, the FTSE 100 moved to new highs after the rate decision, suggesting investors believe a general improvement even if it’s difficult to say that any one thing is great. Let’s hope so.
January asset returns review
The new year began with significant attention on Donald Trump’s influence on global markets. Despite policy uncertainty and fears, equity markets remained stable, with Europe (ex-UK) equities showing the best returns. Trump’s tariff threats initially raised inflation fears, but later hints suggested a more gradual approach. US stocks performed well, with smaller companies outpacing larger ones.
In late January, the AI sector was shaken by DeepSeek, a Chinese start-up, announcing a low-cost AI engine, impacting Nvidia’s market value. Nvidia’s loss affected major tech stocks, while smaller companies benefited from lower AI costs. Asian markets rose, despite initial declines in Chinese stocks due to tariff concerns.
Energy and commodity prices fluctuated, with oil prices spiking due to US sanctions on Russia. Bonds had a turbulent month but ended with gains, aided by declining yields and tightening credit spreads. Global inflation remained contained, with the US Federal Reserve pausing rate cuts, while the ECB continued to cut rates.
US economic sentiment remained positive, though tempered as Trump’s presidency began. Employment measures were strong, but businesses awaited new policies. In Europe and the UK, confidence data showed mixed signals, with manufacturing sentiment rising but overall confidence still deteriorating. China’s consumer confidence showed signs of improvement due to government subsidies, though the outlook remained uncertain.
Bank of England in a bind
On Thursday, the Bank of England’s Monetary Policy Committee (MPC) cut the Bank Rate by 0.25% to 4.5% due to weaker-than-expected GDP growth and declining business and consumer confidence. The labour market was balanced, and there was sufficient progress on inflation and wages to justify the rate cut. The MPC maintained a meeting-by-meeting approach, expecting CPI to rise again but only briefly due to higher gas prices.
The vote to cut rates was seven to two for a cut. Catherine Mann, known for her hawkish stance, even voted for a 0.5% cut, due to weakened growth. Citibank Research forecasts 2025 UK real growth at just 0.5%, albeit the lowest among 54 forecasters.
The BoE expects headline CPI to fall to 2% by 2026 after rising to 3.7% by Q3 2025, acknowledging uncertainty about inflation rising from potential tariff trade wars. The MPC noting a decline in supply growth from 1.5% in early 2024 to 0.75% by Q1 2025.
The BoE highlighted the importance of investment for the UK, observing that rising productivity would not offset a slowing labour force growth. Rates are expected to fall another 0.5% to around 3.75%, with a chance of further cuts towards 3%. Public investment is likely to benefit productivity in the long term, although current uncertainties make it difficult to gauge the exact impact.
Productivity gains may be achieved through technology rather than large-scale infrastructure, and artificial intelligence may yet be our saviour. Meanwhile, if Dr. Mann can be persuaded that faster rate cuts are necessary now, the chances that she will remain a dove must be reasonable and that may persuade those of a more dovish nature to lower rates more in the near future.