Market Commentary 2nd June 2025 – from Charlie Hancock

The UK’s recently announced trade deal with the US was brought into debate last week after the US Court of International Trade ruled that President Donald Trump had exceeded his authority when implementing tariffs following the ‘liberation day’ announcements. UK officials stated that they were continuing to work with the US to implement a new trade deal, despite the court ruling.

The International Monetary Fund (IMF) upgraded its 2025 growth forecast for the UK, predicting an expansion of 1.2%. The IMF also expects the economy to continue growing next year, with a growth forecast of 1.4% for 2026. However, the IMF cautioned that Chancellor Rachel Reeves must remain firm on tax and spending rules to avoid long-term damage to the UK’s public finances.

Mortgage lender Nationwide reported that the average house price rose by 0.5% during May. The year-on-year average house price increase was 3.5%, suggesting that momentum in the property market improved during the month.

Trade relations between the European Union (EU) and the US deteriorated after the US confirmed plans for a 50% tariff on all EU goods from the 1^st June. However, following talks between President Trump and European Commission President Ursula von der Leyen, the deadline was postponed until 9^th July.

Economic data appeared to strengthen the case for the European Central Bank (ECB) to deliver an interest rate cut this month. Headline inflation in Spain and Italy slowed to 1.9% in May, while France saw headline inflation ease to 0.6% year-on-year. In Germany, inflation saw a slight slowdown to 2.1%. Germany’s labour market data showed signs of weakness, with the number of unemployed people increasing by 34,000 in May to 2.96 million, which was higher than the median economist estimate.

Uncertainty regarding US trade policies rose last week after the US Court of International Trade ruled that President Trump lacked the authority to impose many of the global tariffs introduced since the beginning of his second term. Following the court ruling, the Trump administration filed an appeal. Comments from Treasury Secretary Scott Bessent added to the uncertainty, with Bessent stating that US-China trade talks were “a bit stalled”.

A closely watched US consumer sentiment survey compiled by The Conference Board showed a significant improvement in sentiment last month. The improvement gained momentum in the second half of the month following positive announcements regarding a US-China trade deal.

Meanwhile, data for the Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) index, showed that inflation was 2.5% year-on-year in April, marking the lowest level since 2021.

US-China relations appeared to sour after President Trump accused China of violating the terms of a recent agreement aimed at rolling back tariffs. A key US Trade Representative stated that China had not been removing “non-tariff barriers” as agreed under the deal. In response, officials in Beijing called upon the US to “”immediately correct its erroneous actions, cease discriminatory restrictions against China and jointly uphold the consensus reached at the high-level talks in Geneva”.

Economic data in Japan was mixed. Industrial production fell by 0.9% in April, which was worse than the median economist estimate. Core consumer price inflation for the Tokyo region came in at 3.6% year-on-year in May, rising from the 3.4% recorded for April. This marked the highest inflation rate in more than two years, reinforcing expectations of further tightening by the Bank of Japan (BoJ). However, BoJ Governor Kazuo Ueda reaffirmed the central bank’s cautious stance on monetary policy, noting that the central bank recently revised their inflation forecasts lower due to global trade uncertainty and falling oil prices.

The Federal Reserve’s minutes from its most recent policy meeting showed that policymakers remained cautious about inflation risks, with the Fed citing ongoing uncertainty surrounding trade policies. Given that Trump’s tariffs could prove to be inflationary for the US economy, the Fed appears to be taking a cautious approach regarding any monetary policy adjustments.

GBP / EUR – Current 1.1860 Previous 1.1909

The Pound gave up some of its recent strength across the week, falling by 0.58% against the US Dollar and 0.41% against the Euro.