The wild ride continues

Tariff tantrums seem to have been the name of the game in the last weeks; the strong-arm negotiation tactics dominating headlines. For now at least, sentiment is improving as signs of back-pedalling, or at least softening of tone, are providing some relief to financial markets and beyond.

Macro

Conviction is hard to come by right now. Less firmly held views can often impact the flow of capital leading to moves being magnified as liquidity becomes harder to come by. Countries far and wide are continuing to deal with rates that have remained higher than originally envisaged, and with global trade again being put under pressure, manufacturers and consumers showing signs of holding off until the return of greater certainty. This does have some unintended and less than positive consequences, which boils down to less economic activity, better known as growth. Or a lack thereof. Whilst more domestic production and less reliance on imports, or better put, being self-sufficient, is a good thing, it comes at a cost. We are at the point of seeing this come through in central bank rhetoric and specifically with regard to inflation. On the periphery and soon to (hopefully) be centre stage would be the de-escalation of conflict with a path to permanent peace in Ukraine. News broke Tuesday of a partial ceasefire being palatable for President Zelensky. Something more permanent really would be something to cheer about.

Risk

One of the key proxies tracking the volatility of the stock market, the VIX, spiked just below (27.9) the all-important “danger” level of 30 where panic begins to ensue. Since March 10, we have seen it track back to the high teens. Not only have we seen this “fear index” indicate calmer waters, but asset prices in risk have also recovered somewhat from what some commentators began labelling a more permanent correction. Looking at year-to-date returns, the S&P being off 5% is now the outperformer to the downside globally. Other US indices remain in the red, but a far cry from anything screaming correction right now. The big surprise to many has been the fantastic performance of the European market. Here almost all are up over 10% with both Germany and Spain exceeding 17%. Worth remembering though there is a degree of both catch-up following an average 2024, as well as the backdrop of serious outperformance where price earnings ratios elsewhere were getting out of hand in the US.

Credit

Mind the cliff would be the advice to give here. Next year the number of maturities really starts to kick in. For now though, the price of borrowing in investment grade land remains almost unbelievably low versus the risk free rate. Whilst good for the economy of course, the correct price for money is an extremely important component of capital markets and the global system more broadly, as it is the efficient allocation of scarce resources that maximises productivity. One market that does continue to show signs of strain though is in the riskiest part of the investible universe. Sub-investment grade bonds where the probability of repayment is entering “unlikely” territory has, for a third straight week, grown. Whilst only at one year highs, it is important to take note of potential canaries in coalmines, particularly as base rate and reinvestment risk start to bite.

EUR

Your cutting cycle may face temporary interruption. This is the message from a small cluster of voting members at the ECB who are starting to feel like inflation might be rearing its ugly head once again. The market is in disbelief but is moving more towards being on the fence than previously. Nothing quite like a 50/50 chance to keep traders on their toes right up to the last minute. With the meeting slated just before Easter, there is still time for those eggs to hatch. Additional tailwinds are coming from data released Monday, with economic activity growing at its fastest pace in seven months. More help is likely to come from increased government debt issuance to be spent on infrastructure and defence. History tells us such investment can contribute significantly to GDP. Some of the very large moves in the price of German Government debt though, where the nation saw their cost to borrow rise sharply in just a few short sessions, is a timely reminder that such policies are a careful balancing act, and never free.

GBP

Another month, another meeting. As expected, rates held. In fact, despite the decision prior seeing an unexpected split with one member voting for 0.50% in relief, all but one voted for no change, and at just 0.25% down the outlier. Recent data has highlighted the recovery of services (in expansionary territory) over manufacturing (hitting an 18-month low). In a service-based economy this is a good thing. The Bank of England, though, will be continuing to monitor wages in this sector given it is a proxy for the future path of inflation (and services inflation remains at 5%) and thus the effectiveness of existing policy to curtail price increases more broadly. Stress tests for banks have been softened, whilst the FCA has also torn up over 100 pages of its rulebook to help facilitate freer and more efficient markets in a bid to use its decoupling from Europe as a competitive advantage.

The Chancellor was handed good news on the morning of her Spring Statement with inflation unexpectedly falling back to 2.8%, but still well above the 2% target, which she later said the OBR doesn’t see being reached until 2027. The OBR’s forecasts for growth drew the most discussion with its prediction for 2025 being halved to 1%, but its increases to the following years’ forecasts saw it move the position by the end of the parliament marginally higher than it saw in December. Otherwise the statement was broadly market-neutral, shuffling spending to remain within her fiscal rules, hanging her hopes for growth on accelerated defence spending.

USD

The Federal Reserve also held, and with tariffs being in flux, coupled with a strong desire to manufacture more not just domestically but eventually for export, there are reasons to be cautious. We may also see payroll data soften with fewer folks being employed. This highlights the fact that much growth has been attributable to immigration. What next? Logically one would expect with reduced supply for the price of a tighter labour market to adjust wages higher in order to attract talent. Services and manufacturing mirrored the UK in terms of expansion versus contraction, albeit more muted. There is certainly evidence of consumer sentiment deteriorating with all this heightened uncertainty. Housing data has also not been great. Along with US government interest expense doubling in just 5 years, it highlights the increased need and pressure for fiscal reform. We’ll be revisiting the debt ceiling once again in just a few short weeks. Whilst it is not expected to be controversial, given new policy and DOGE cutting in full swing, a guarantee of timely resolution feels perhaps just a little less likely.

So what?

Continued uncertainty far and wide continues to be the name of the game. No matter whether one correctly predicts any or all of the likely outcomes, the most important actions as custodians of cash is to be prepared. Rates remain high, credit cheap, and opportunity in cash great as an asset class, particularly for term.

*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.