The week has been dominated by central bank meetings, though as expected there were no actual shifts in policy from the US Federal Reserve, the Bank of England or the Bank of Japan
Market volatility has persisted to an extent, with the lack of certainty on tariffs continuing to weigh on market sentiment. While we may have seen some spring sunshine in London over the past few days, this dark cloud over market sentiment is unlikely to be lifted any time soon given President Trump’s proposals for “reciprocal tariffs” are set to be announced during April.
History suggests that when we have surges in US policy uncertainty to extreme levels, as we have witnessed in recent weeks, the market recovery can be swift. But is it different this time, with uncertainty over tariffs potentially a longer-term theme? We should get more clarity over tariffs in early April for Mexico and Canada, and any potential extensions to the pause in the implementation of some levies, along with more detail on what is in store for other countries and regions such as Japan and Europe, as the “reciprocal tariffs” are announced. As we’ve already seen with Mexico and Canada, there is plenty of scope for bilateral deals and exemptions, but in the short term, there is inevitably an impact on consumer sentiment, corporate spending and strategy decisions. April may not deliver complete clarity but will hopefully at least give an indication of how far and wide President Trump intends to pursue his tariff agenda.
The messaging was very much ‘wait and see’ from both the US Federal Reserve (Fed) and the Bank of England as they left rates unchanged this week. The Fed maintained rates at 4.25-4.5% while amending their forecasts to expect lower growth and higher inflation. GDP is now expected to climb by 1.7% this year, with inflation at 2.7%. Fed Chair Jay Powell said “clearly some of it, a good part of it” is related to the impact of tariffs, adding that such measures “tend to bring growth down and inflation up”. Powell said that policy was “in a good place” and the Fed “did not need to be in a hurry” to move rates given “unusually elevated uncertainty”.
The Bank of England kept rates at 4.5% with Governor Andrew Bailey saying while “there’s a lot of economic uncertainty at the moment”, “we still think that interest rates are on a gradually declining path”. The Bank said it was focused not just on whether global and domestic uncertainty would impact demand but also if UK wages and price pressures could prove more persistent than it expected. The Bank expects the UK economy to grow at 0.75% this year with inflation at 3.75%. Markets are pricing a May rate cut at a 62% probability with two cuts expected before year end.
The Bank of Japan also left policy unchanged at 0.5% as expected with a very gradual tightening path ahead, despite clear inflationary pressures. CPI in Japan for March was 3.7% year on year, the 35th consecutive month above target, while the spring wage round, known as the shunto, resulted in the highest results for 34 years, with average wage increases of 5.46%, higher than expected and driven by a tight labour market thanks to worsening demographics.
In the world of politics there have been a few noteworthy events over the week. A telephone conversation between Presidents Trump and Putin failed to result in a major breakthrough in resolving the Ukraine conflict, though President Putin did order the Russian military to refrain from attacks on Ukrainian energy infrastructure for the next 30 days. According to the Kremlin, Putin highlighted a “series of significant issues” about enforcing a ceasefire agreement and “serious risks” around Ukraine’s compliance with any agreement. The White House said the leaders had “agreed this conflict needs to end with a lasting peace and stressed the need for improved bilateral relations between the US and Russia”. It looks like while the US is anxious for a deal to be reached, and soon, Putin is very comfortable playing the long game.
In China, state media reported on a “Special Action Plan to Boost Consumption” from the State Council, to include increases to the minimum wage, increased support for education and a subsidy system for childcare. The package will also support inbound consumption via tourism. China continues to implement incremental stimulus, though there remain expectations there is more to come as China reacts to US tariffs.
Meanwhile, in Germany the prospective Chancellor Friedrich Merz reached agreement with the Green party to support his proposal for his fiscal package. The motion passed the lower house of Parliament earlier this week and is expected to pass the upper house today. The package is as expected, exempting from debt restrictions the spending of over 1% of GDP on defence, civil protection and intelligence along with a €500bn infrastructure fund for additional investments over a decade, and permitted borrowing for Germany’s 16 states to be increased to 0.35% of GDP above the debt limit. Estimates have suggested the combined amount of this fiscal stimulus could be as much as 3-4% of German GDP by 2027 – in other words, huge.
Our Asset Allocation Strategy meeting took place and reconfirmed our constructive view overall, despite the obvious policy uncertainty that prevails for now. We are clearly not yet done with tariffs, and this is an issue that will likely continue to be a theme over the coming years given it is seen as a policy weapon by the Trump administration. We have seen some pain inflicted on markets by the sequencing of policy, with more market friendly policies, such as tax cuts and deregulation yet to come. We continue to express a preference for US equities; while the Magnificent 7 stocks are clearly having a tougher time, the broadening out in market returns is welcome, and the economic data remains supportive of this being a ‘softer patch’ rather than anything more troubling. It’s also worth noting that some, not all, of the Magnificent 7 now have far more attractive valuation. But the rising tide, that has lifted all boats, has clearly turned.
We have also taken a more positive view on European equities, though we note that in the very short term, news on tariffs could cause some volatility. This however represents an opportunity to add to a region where we believe genuine change is taking place, given the shift in fiscal policy in Germany has the potential to be a huge economic stimulus. While other countries such as France and Italy do not possess the fiscal bandwidth available to Germany, higher defence spending backed by EU flexibility on loans and higher deficits will be stimulative and the post covid recovery fund (the Recovery and Resilience Facility) will be making the peak of its disbursements over the coming 18 months. Further tailwinds could come from export demand increasing as China also stimulates. Another boost could come, at some point, from a ceasefire in Ukraine and cheaper energy, though as events this week suggest, this may still be some way off. While European equities are not as cheap as the UK, after a period of significant underperformance versus the US, and with a catalyst for change finally in place, we are minded to take a more positive view on the region. US equities are no longer the only game in town!
Finally, the Rugby Six Nations is over, and well done to England for edging a very narrow win over Wales (!!!) Another wooden spoon for the collection. It feels like the Welsh Rugby Union needs some fresh thinking. Maybe the German government can help…
Source: Columbia Threadneedle Investments as at 21 March 2025.
