On borrowed time

• Japan equities which advanced +5.1% on trade deal relief
• Other equity markets which also ground higher, between +0.5% to +1.6% (all equities in sterling terms)
• Bonds generally, whether government or corporate, UK and international, gaining +0.4% to +0.6% (in local currency terms)

• Brent crude oil fell -1.2% on concerns of oversupply and weak growth (in dollar terms)

The UK government borrowed over £6.6bn more in June this year compared to June last year. It was the second-highest June figure since records began in 1993: only June 2020 – in the depths of the Covid-19 pandemic – outstripped it. Paying interest on central government debt – especially index-linked gilts – jumped £8.4bn against June 2024.

In its first year in power, Labour has therefore cumulatively borrowed some £22bn more than forecast. The roughly £10bn fiscal buffer Reeves set aside at her first Budget has largely evaporated. Without reducing public spending or igniting growth, it’s increasingly likely that she may have to eke out more breathing space through tax rises – lest she breaks her self-imposed fiscal rules. The bond markets are watching closely.

Separately, last week the government announced its third pension review, potentially eyeing a change to the state retirement age. It also confirmed that it would move ahead with bringing most unused pension pots and death benefits into the estate for inheritance tax purposes. The government estimates this could raise £1.5bn per year.

Donald Trump announced a 15% US-EU tariff deal with President Von der Leyen of the European Commission. The agreement ends almost four months of negotiations and avoids a 30% tariff on all EU products if no deal had been made by 1 August. Most European exports to America are in scope but a 50% tariff remains on steel. A list of goods was agreed that will face zero tariffs including certain raw materials, aircrafts and chipmaking. Finally, the EU will be spending $750bn on US energy products and invest $600bn in the US, a deal that includes procuring military equipment. How much of this investment is new, and the authority Von der Leyen has to agree to it, is unclear.

Policymakers may feel relief that a trade war has been averted. But the deal will undoubtedly face criticism by political opponents who’ll call it an economic defeat for the EU. While the list of tariff-free goods is a small win for the bloc and contains items that America needs from it, the new 15% tariff is more than nine times higher than the rate in place under Biden. On his flight back, the European Commissioner for Trade, Maros Sefcovic, explained that the choice was simply between ‘stability over total unpredictability.’

Financial markets had perhaps priced in the trade agreement, especially in Europe. On Monday morning, the CAC 40 and the FTSE MIB were up by 0.9% while the German DAX Index was up 0.5%, before shedding gains.

The US Federal Reserve’s independence is coming under increasing pressure from President Trump and his administration. Trump and Treasury Secretary, Scott Bessent, continue to criticise Fed chair Jerome Powell for keeping interest rates unchanged since December. Trump argues that higher rates are inflating the cost of servicing the US’s $36 trillion of debt.

Some administration officials and commentators have even floated the idea of a closer policy alignment between the Fed and the US Treasury Department – a move that would challenge the Fed’s long-standing independence. The central bank’s dual mandate is focused on maximum employment and stable prices (inflation), not servicing the costs of US debt. In response, Powell has pointed to the economic uncertainty created by Trump’s proposed trade tariffs as a key reason for maintaining current rates while the Fed awaits their impact.

While Wall Street broadly supports Powell staying in post until his term ends in May 2026, some are calling for him to step down voluntarily to help protect the Fed’s independence from political interference.

Last week saw Trump visit the Fed’s headquarters mid-renovation, clashing with Powell over the project’s cost and renewing calls for rate cuts. In an awkward exchange, Powell publicly corrected Trump’s cost claims. Despite the friction, Trump said he won’t fire Powell and expects rate relief.

• Stock markets rally to record highs: The S&P500, Nasdaq and FTSE100 all hit all-time highs last week, driven by trade deal optimism and strong U.S. earnings. The Nasdaq is now up over 27% since its 9 April low (‘Liberation Day’)
• UK & India sign a new trade deal: The agreement cuts average Indian tariffs on UK goods from 15% to 3%, with major reductions for UK whiskey and car exports. In return, UK tariffs on Indian textiles and jewellery are lowered
• Strong US Composite purchasing managers’ index: PMIs jumped to 54.6 in July, up from 52.9 in June, its fastest growth in 30 months. The momentum is driven by strong services activity, offsetting weakness in manufacturing, which saw its first drop in new orders this year. A figure above 50 signals expanding activity, and below it, contracting
• UK Composite PMIs dipped to 51 in July from 52 in June, as services slowed and manufacturing remains stagnant. Firms report rising employee costs and weaker business confidence
• UK retail sales rebound - retail volumes rose 0.9% in June, helped by warmer weather-boosted food sales, particularly supermarket sales
• The European Central Bank held rates unchanged at 2%, following seven consecutive cuts, as eurozone inflation returns to its 2% target
• UK car and van production fell -12% in the first half of 2025, hitting its lowest level since 1953 (excluding the Covid pandemic), according to the Society of Motor Manufacturers and Traders

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