Market Commentary 17th March 2025 – from Naigil Johnson

Data from the Office for National Statistics (ONS) showed that the UK economy unexpectedly shrank by 0.1% in January. Economists had expected Gross Domestic Product (GDP) to grow by 0.1%. The manufacturing sector was a weak spot, with output declining by 1.1% during the month. Declining activity in the construction sector also weighted on growth.

UK house prices remained stable in February, with the Halifax House Price Index indicating a slight dip of 0.1% month-on-month and annual growth holding steady at 2.9%, bringing the average house price to £298,602. The housing market showed signs of balance, with a slowdown in first-time buyer price growth, while prices for home movers rose. Despite a dip in growth, market activity remained resilient and similar to pre-pandemic levels, reflecting robust demand levels despite higher borrowing costs.

European equity indices experienced a slight correction this week, with prices generally retreating after the sharp gains seen in the previous week. In Germany, negotiations continued ahead of a crucial spending plan vote. The proposed reform would exempt defence spending from debt limits and establish a €500 billion infrastructure investment fund. Whilst the DAX moved largely sideways last week, sentiment appears optimistic ahead of the crucial German spending plan vote.

Eurozone industrial output stabilised in January 2025, showing no change from the previous month. This surpassed market expectations of a 0.9% decline and ended a 20-month period of contraction, following a revised 1.5% drop in December.

February’s Consumer Price Index (CPI) report revealed a slowdown in inflation, easing concerns about the US economy after several weeks of heightened market volatility. The CPI rose 2.8% year-on-year in February, down from January’s 3% and beating economist expectations of 2.9%. On a monthly basis, the index increased by 0.2%, slower than the 0.5% rise in January and better than the 0.3% increase expected by economists.

Consumer Sentiment dropped in March as President Trump’s tariffs sparked inflation worries. According to the University of Michigan’s latest survey, the mid-month reading showed a 10.5% drop from February, which was significantly worse than expected. This figure was also 27.1% lower than a year ago and the lowest since November 2022. Concerns regarding where inflation is headed appeared to have influenced the figures. US tariffs on aluminium and steel imports took effect last week, while Trump has proposed significant further tariffs on goods ranging from vehicles to liquor.

A manufacturing Purchasing Managers’ Index (PMI) for February 2025 showed an improvement in growth, exceeding the initial estimate and improving from January’s data. Whilst this marked the second consecutive month of growth in the sector and signalled signs of expansion, there are indicators that suggest this growth may have been partly due to pre-emptive purchases in anticipation price hikes and supply disruptions due to tariffs.

Chinese equities saw a recovery following last week’s decline as investors continued to assess evolving trade policies and economic uncertainties in the US. Sentiment was further lifted after China unveiled a special action plan aimed at reviving consumption and stabilising stock and real estate markets. The plan includes measures to boost household income, encourage spending and support population growth

China’s retail sales rose by 4.0% in the first two months of 2025, in line with market forecasts. This was the strongest increase in retail turnover since last October and was boosted by rising consumption during the spring Festivals.

For the third consecutive year, many of Japan’s largest companies, including tech giants and the car manufacturer, Toyota, agreed to significant wage hikes to help workers cope with inflation and address labour shortages. Economists anticipate that Japan’s average pay increase for 2025 will be similar to last year’s 5.1% rise, which was the largest in 33 years. This contributed to the Bank of Japan’s decision to end its decade-long ultra-loose monetary policy.

The Japanese yen weakened last week following the union wage talks, with investors also weighing up the impact of trade tensions and the growing uncertainty regarding Trump’s proposed 25% tariffs on Japanese vehicle imports.

The increase continued to be largely driven by rising government bond yields in other global markets. News of a planned fiscal spending boost in Germany appeared to influence investor sentiment, leading to higher borrowing costs in the UK.

German Bund yields continued to rise, reaching a 2011-high of 2.9% during the week. Traders braced for the crucial spending reform vote this week. The proposed reform, which exempts defence spending from debt limits, is expected to pass, with investors demanding higher yields for lending to Germany as a result.

US Bond yields remained relatively stable. The week’s inflation data, which was slightly below expectations, appeared to contribute to Treasury yields remaining steady last week.

GBP / EUR – Current 1.1887 Previous 1.1930

The Pound saw a slight gain against the US Dollar over the week, rising by 0.12%. This was following a strong increase of 2.72% in the previous week. The Dollar remained under pressure amid market uncertainty, with investors closely watching U.S. economic data and assessing the likelihood of interest rate cuts. Against the Euro, the Pound declined slightly by 0.36%, as the Euro strengthened on optimism surrounding economic recovery measures within the Eurozone and hopes for significant investment programs.