Holding not folding

• Equities generally, with Japan (+3.1%), Asia-ex Japan (1.3%) and emerging markets (+1.2%) the best in sterling terms
• Gold advanced +1.3% in dollar terms, topping $3,000 per ounce

• The euro and yen fell fractionally against sterling by -0.4% and -0.3% respectively

US trade policy uncertainty appears to have hit short-term growth and inflation forecasts, convincing the Federal Reserve to hold its benchmark interest rate at 4.25%-4.5% last week. Fed policymakers still forecast two 0.25% rate cuts this year but lowered their growth forecast from 2.1% to 1.7% for 2025 and stated that “inflation remains somewhat elevated”. As well as ensuring maximum employment, stable prices and inflation of around 2%, the Fed is keen to anchor consumers’ expectations and bolster confidence, lest fear of worse times ahead becomes self-fulfilling. President Trump took a swipe at the Fed, demanding that it cuts rates. Trump also fired two Democrat officials at the Federal Trade Commission overseeing consumer protection and anti-trust laws. Some view the firings as a further test of the independence of those official bodies Trump distrusts.

Germany has agreed to its biggest increase in borrowing since WWII, releasing around €1 trillion to fix decrepit infrastructure and bolster its army and defence capabilities. Chancellor-in-waiting Friedrich Merz’s coalition government will create a €500bn infrastructure fund over 12 years, of which €100bn will go immediately into a national Climate Transition Fund, with money for federal and local governments to modernise hospitals, schools and roads. Merz also wants to exempt defence spending above 1% of GDP from Germany’s strict borrowing limit or “debt brake” which has been enshrined in law since the Global Financial Crisis of 2008, allowing the 16 regions to borrow up to 0.35% of GDP from regional lenders, providing they balance their budgets. Germany’s current debt-to-GDP ratio of 63% will increase markedly in coming years, but it can afford to borrow more and we believe markets will easily absorb more German debt issuance. Many economists now forecast growth to double in Germany from recessionary levels to ~2% within a couple of years.

Chancellor Rachel Reeves is expected to announce a range of spending cuts in this week’s Spring Statement. The news that government borrowing last month was higher-than-expected may jeopardise Reeves’s attempt to stick to her self-imposed fiscal rules: not to borrow to fund day-to-day public spending and to have debt as a share of UK GDP falling by the end of the current parliament in 2029/30. Some announcements were trialled last week, with Work and Pensions Secretary, Liz Kendall, earmarking changes to the welfare system which may save £5bn by the end of 2030. The challenging political choices for the government are clear to see; prime minister, Kier Starmer, has already announced cuts to the international aid budget in order to increase defence spending, as well as the decision to abolish NHS England in order to improve efficiency. The latest forecasts from the government’s fiscal watchdog, the Office for Budget Responsibility (OBR), will be set out to Parliament at Wednesday’s Spring Statement, with estimates of current tax receipts and public spending feeding into its forecast of whether the government is likely to keep to its fiscal rules. At the time of the Budget in October, the OBR models suggested that Reeves had c.£9.9bn headroom against her borrowing rules, however this is now expected to have been eroded completely.

Elsewhere, the Bank of England (BoE) held its base rate at 4.5% last week, noting that global economic uncertainty had increased. However, BoE governor Andrew Bailey also noted that the Bank was still of the view that rates were "on a gradually declining path". Economists currently expect two further rate cuts in 2025, with the first possibly in May.

China unveiled plans to revive its economy, improve consumer confidence and tackle an uncertain trade war with the US at its annual National People’s Congress last week. Consumption in China has still not recovered to pre-Covid levels and data is mixed: whilst retail sales grew by 4% in February, new home prices fell by 4.8% in February – both compared to same month last year. This data is set against an already-unveiled growth target of 5% for 2025.