Market Commentary 11th March 2025 – from Charlie Hancock

A Purchasing Managers’ Index (PMI) for the UK’s construction industry showed that the sector suffered a relatively sharp downturn last month. Activity contracted at the fastest pace seen since May 2020. The housebuilding industry saw activity decline for the fifth consecutive month, with firms citing weak demand from homebuyers.

Data from the Bank of England (BoE) showed a relatively sharp jump in mortgage lending between December and January. The BoE said that first time buyers taking advantage of a temporary reduction in stamp duty, which ends on the 31^st March 2025, contributed to the rise in demand for mortgages.

In Germany, the political parties which are in discussion to form a coalition government reportedly agreed last week to implement significant changes to Germany’s fiscal rules. The proposals include greater defence spending, an infrastructure investment fund of €500 billion and looser debt rules for local authorities. Across the wider European Union (EU), leaders of the bloc’s member states agreed to jointly borrow €150 billion to spend on defence, with EU leaders reportedly concerned about the impact of reduced US military support for Ukraine.

The European Central Bank (ECB) cut interest rates by a further 0.25% last week, bringing their key interest rate down to 2.5%. The central bank’s president, Christine Lagarde, stated that rates were now “meaningfully less restrictive” and justified the decision to cut rates by adding that the Eurozone faces “huge uncertainty”.

Uncertainty regarding President Donald Trump’s ongoing trade disputes appeared to prompt heightened volatility in US equity markets last week. Trump announced on Thursday that he would delay tariffs until April on any goods covered by the existing United States-Mexico-Canada agreement, which was negotiated by Trump during his first term as president.

Economic data for the US was mixed. A manufacturing PMI showed that the sector remained in expansionary territory during February, while the services sector saw relatively strong growth. Firms did however cite concerns around the growing uncertainty resulting from tariffs and federal spending cuts. Meanwhile, labour market data showed that the US economy added 151,000 jobs during February, which was slightly lower than expected.

The Chinese government announced their key targets for 2025 last week. The target growth rate for the economy was set at 5% for the third consecutive year, with the government hopeful that increased fiscal spending will offset the potential negative impacts from a trade war with the US. The fiscal deficit goal was set at 4% of Gross Domestic Product (GDP), while the government reduced their inflation target to 2% given the ongoing deflationary pressures in the economy.

In Japan, negotiations between the country’s largest union group and employers saw an average wage increase demand of 6.09%. This marked the highest average wage increase request since the early 1990s and was viewed as a sign that inflationary pressures in the Japanese economy are continuing to build. Japanese government bond yields moved higher during the week, with expectations for rate hikes growing.

UK economic data painted a mixed picture last week, however, rises in government bond yields elsewhere around the globe appeared to be the main driver of UK borrowing costs moving higher.

Proposals for a large fiscal spending package and looser borrowing rules appeared to prompt the rise in German Bund yields last week, with investors demanding higher interest rates for lending to Germany.

The chair of the Federal Reserve, Jerome Powell, stated that policymakers “do not need to be in a hurry” to make changes to interest rates. Powell also said that the US is facing growing uncertainty regarding trade, immigration, fiscal policy and regulation.

GBP / EUR – Current 1.1930 Previous 1.2124

The Pound saw a strong increase against the US Dollar last week, rising by 2.72%. The US Dollar weakened against most major currencies, with growing uncertainty around policy under the Trump administration prompting currency traders to turn bearish on the Dollar. Against the Euro, the Pound declined by 1.60%. The Eurozone currency strengthened as markets reacted to the proposals for greater fiscal spending in Germany.