CHANCELLOR ANOUNCES SPENDING CUTS TO APPEASE BOND MARKETS

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Data Sourced from FE Analytics, and Bloomberg Finance LP

CHANCELLOR ANOUNCES SPENDING CUTS TO APPEASE BOND MARKETS

This week we saw Chancellor Rachel Reeves deliver her Spring Statement in what was effectively a 30 minute address to UK gilt investors. With economic growth lower than expected and a need to raise defence spending, the government is cutting welfare to stick with its pledge not to hike taxes. This was not a speech to core voters. Reeves seems to be making cuts now, hoping that future growth will make voters forget any short-term pain and dwelling on positive OBR growth forecasts for 2026 and beyond will not improve their mood about cutting spending now. Neither was the speech an effort to head off criticism from the opposition benches, as Tory economic policies are noticeable only due to their absence.

By making a show of meeting its Stability Rule of reducing borrowing in the fifth year of any forecast, the chancellor laboured to show that despite borrowing rising in the short term, gilt investors just need to be patient to allow reforms and rising growth to tame borrowing. Muted market reaction shows the cuts have bought some time, but the small margin in the Chancellor’s forecast doesn’t allow a lot of room for further disruption.

US: TARIFFS ROCK AUTOMAKERS AND SAP SENTIMENT

Policy uncertainty and tariff threats are eating into sentiment in the US manufacturing sector and rocking markets. President Trump’s announcement of 25% tariffs on all car imports to take effect next week, sent shares of carmakers around the world reeling. The S&P 500 fell 1.6%, with GM down 11.5% and Stellantis down 9.5%, in immediate reaction. Trump also plans tariffs on computer chips, pharmaceutical drugs, lumber and copper. Copper has topped $10,000 a ton in London on global demand, but US tariffs have created a $1,500 premium in New York, as traders are rushing to get copper into the US before tariffs hit. A similar premium has built up in the gold market and the safe haven metal climbed to $3,050 per ounce this week, while US Treasuries sold off.

Tariff uncertainty pushed Philadelphia Fed’s non-manufacturing gauge to a 20-month low, signalling a decline in firm-level general activity, new orders, and sales. Also, the majority of American Chief Financial Officers now see a recession coming before end of 2025.

UK: INFLATION SLOWS UNEXPECTEDLY BUT GROWTH FORECAST TRIMMED

Chancellor Rachel Reeves announced big spending cuts as the government struggles to stay within its borrowing limits. The Spring Statement set out cuts to welfare and government departmental spending to offset slower economic growth and the planned increase in defence spending without raising taxes further. The Office for Budget Responsibility reduced its forecast for economic growth from 2% to 1% in 2025. It sees inflation hitting 3.2%, before falling to 2.1% next year.

Based on the OBR’s economic forecast, the chancellor said the budget deficit of £36bn in 2025/26 would become a £9.9bn surplus by 2029/30. The Debt Management Office plans to borrow £304bn in 2025/26. This is slightly below expectations but is a hike on the £277bn this year. Markets were unmoved on the day of the announcement but gilt yields have risen this week and the pound has weakened slightly against the US dollar. Meanwhile inflation fell more than expected last month as lower clothing prices helped CPI slow to 2.8%.

TURKEY: MARKET STABILISE AFTER PROTESTS TRIGGER INVESTOR FLIGHT

Turkey’s government has intervened to help steady markets after political protests caused Turkish markets to tumble. The Turkish lira fell more than 12% against the dollar last week following huge protests over the arrest of President Recep Erdogan’s biggest political rival. The BIST 100, Turkey’s main equity index, fell 16% after the arrest of Ekrem Imamoglu and the yield on Turkey’s 10-year government bond jumped more than four percentage points to almost 31%.

Large scale protests have continued as Imamoglu was given a jail sentence for corruption. He also had his university degree cancelled and this would disqualify him from standing in as a candidate in a presidential election. Markets have mostly stabilised this week as the government intervened to ban short selling in the stock market and lifted restrictions on company share buybacks. The central bank sold around $25bn of foreign currency and increased its overnight lending rate to 46% to prevent any further decline in the lira.

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