Market Commentary 31st March 2025 – from Naigil Johnson

The UK’s headline annual inflation rate slowed to 2.8% in February 2025, down from 3% in January and below expectations of 2.9%. Grant Fitzner, the chief economist at the Office for National Statistics (ONS), noted that women’s clothing was the biggest driver for this month’s fall in inflation. Inflation also eased in recreation, culture, and housing, food inflation remained at 3.3%, with transport and restaurant prices rising slightly.

UK retail sales rose 1% in February 2025, beating expectations of a 0.3% decline, following a revised 1.4% increase in January. Sales in household goods stores surged by 6.8%, the strongest gain since April 2021, with hardware stores leading.

The Office for National Statistics (ONS) reported that the British economy grew at an annualised rate of 1.5% in the last quarter of 2024, slightly surpassing the initial estimate of 1.4% and up from 1.2% in Q3, marking the strongest annual growth in two years.

European shares extended their losses following the release of the US core Personal Consumption Expenditures (PCE) inflation data, which showed inflation at 2.8%, above expectations. While US stocks also dropped, the sentiment was further dampened by President Trump’s announcement of 25% tariffs on foreign automakers, with threats of higher tariffs on the EU and Canada if they worked together to combat duties from the US.

The Eurozone Purchasing Manager’s Index (PMI), which tracks both services and manufacturing, climbed to a seven-month high in March, rising from 50.2 in February to 50.4. It appears that expectations of substantial defence and infrastructure investment has added optimism about a more sustained recovery, particularly in Germany, where the manufacturing PMI saw a sharp rise.

The IFO Business Climate Index, which measures business sentiment on Germany’s current conditions and outlook for the next six months, rose by 1.4 points to its highest level since July 2024. The increase appears to have signalled improved satisfaction and optimism among businesses about the current economic situation in Europe’s largest economy.

US equities sold off amid concerns about the economic impact of President Trump’s trade disputes, as uncertainty about the scope of his policy dampened appetite for risk. Investors were preparing for the most extensive round of US tariffs to date, which are set to be revealed on 2^nd April. The increasing uncertainty surrounding these trade measures significantly impacted investor sentiment, particularly within sectors that are vulnerable to global trade fluctuations.

The U.S. Bureau of Economic Analysis (BEA) released the 2024 Q4 GDP growth reading, which came in at an annualized 2.4%. This notable drop from the Q3’s 3.1% growth confirmed that the economy started to slow down even before the tariffs were announced.

The University of Michigan’s consumer sentiment index was revised down for March. This marked the third consecutive month of decline, bringing consumer sentiment to its lowest level since November 2022. Consumers’ outlooks worsened across several areas, including personal finances, business conditions, unemployment, and inflation, with the ongoing government policy changes and concerns about potential economic hardships weighing heavily on consumer sentiment.

The Trump administration’s announcement of a 25% tariff on auto imports into the US seemed to put pressure on the shares of Japanese carmakers and other exporters. The news raised concerns about a potential trade war, further dampening sentiment in Japan, particularly with fears of retaliatory tariffs from US trading partners.

Tokyo’s core Consumer Price Index (CPI) rose by 2.4% year-on-year, up from 2.2% in February, surpassing the consensus forecast. This marks the fifth straight month that core inflation has stayed above the Bank of Japan’s (BOJ) 2% target, fuelling expectations for continued monetary policy normalisation. It seems that the BOJ’s decision to keep interest rates unchanged stems from the need to adopt a more cautious approach as it assessed the impact of rising global risks on Japan’s economy.

China’s statistics bureau reported a 0.3% decline in industrial profits during the first two months of the year compared to the same period last year. This contraction fell short of economists’ forecasts for growth and underscored the need for China to boost domestic demand, especially with the ongoing threat of higher US tariffs.

GBP / EUR – Current 1.1954 Previous 1.1939

The Pound increased by 0.16% versus the US Dollar last week. The positive UK economic data appeared to contribute to the strengthening of the pound against other currencies. Against the Euro, the Pound rose by 0.13%.