Summary

• Risk assets rally: Equities were broadly positive after strong US jobs data eased concerns of an economic slowdown, despite ongoing tariff headwinds

• UK equities strong: UK equities finished the week in positive territory, with both large-cap and small-and-medium sized (SMID) indices showing double-digit gains year-to-date

• US market rebounds: US stocks moved higher for the second consecutive week, supported by resilient macro data, the 'TACO' trade, and strong corporate earnings

• European Central Bank (ECB) rate cut: The ECB cut base rates by 25 basis points (bps) to 2%, with President Christine Lagarde signalling that policymakers are nearing the end of their rate-cutting cycle

• Policy noise continues, but fundamental data remains resilient: The impact of public spats on social media notwithstanding, the ‘noise’ which has been a feature of the last six months has not yet translated to concerning deterioration in the hard data.

Market review

UK political landscape and defence spending

UK equities ended the week in positive territory, with both large cap and SMID now sitting on double-digit gains year-to-date. On Monday, Keir Starmer committed to build up to 12 new attack submarines as part of the government’s strategic defence review, but refused to be drawn on a date that the government will reach its ‘ambition’ to spend 3% of GDP on defence. On Thursday, the Prime Minister backed Nato’s push for all members to spend at least 3.5% of GDP on defence by 2035. This, in combination with an additional 1.5% already spent on areas such as cyber security and defence-related infrastructure, would bring spending of NATO members in line with the 5% demanded by the Trump administration to ‘equalise’ the burden of defending Europe. The government will face renewed pressure to detail where the funds for higher spending will come from.

The US rebound continues

It was a strong week for risk assets, with equities broadly positive after May's US jobs data eased concerns of an impending economic slowdown amidst continuing tariff headwinds. US stocks moved higher (+1.6%) for the second consecutive week, with most indices now back in positive territory for the year in US Dollar terms, and up around 20% from the lows seen in April. Resilient macro data, a continuation of the ‘TACO’ trade (referring to ‘Trump Always Chickens Out’ due to delayed tariffs), and strong corporate earnings have underpinned equity markets. Dollar weakness against sterling (-7.8% YTD) and the euro (-9.5% YTD) has made it a more challenging period for international investors in US stocks.

Strong corporate earnings, particularly in big tech and communication services, have supported the rally. S&P 500 companies grew profits 12.5% year-on-year in the quarter, making current 2025 expectations for 8.5% year-on-year growth look relatively achievable. While tariff-related uncertainty likely pulled forward some demand in Q1, corporate fundamentals appear to support the hypothesis that the US consumer and economy remain healthy. Where markets were pricing in a rate cut at the Federal Reserve (Fed) meeting on 18 June with 100% probability two months ago, that probability has now fallen to close to zero.

US economic indicators

The Labor Department reported nonfarm payroll numbers ahead of expectations, with the economy adding 139,000 jobs in May versus consensus at 130,000. Strong hiring in healthcare (+62,000) and leisure and hospitality (+48,000) more than offset policy-related reductions in Federal Government employment (-22,000) and Manufacturing (-8,000).

The unemployment rate held steady at 4.2% and has now been rangebound between 4.0-4.2% for 12 months – these levels continue to be extremely low by historical standards. Equities rose in response to the news as employment trends continue to serve as a key indicator of consumer strength amid a highly uncertain policy environment. Yields on Treasuries also rose, with the 10-year moving back to the key 4.5% level. In contrast to the concern around rising yields in recent weeks driven by deteriorating fiscal sustainability, these ‘resilience-driven’ moves have been met with less commentary. Significant Treasury auctions on Wednesday (10-year) and Thursday (30-year) this week will test the state of the market.

The May Purchasing Managers’ Index (PMI) for manufacturing came in below expectations at 48.5, whilst services also surprised negatively at 49.9. The services PMI was the first contractionary reading since June 2024.

Political and fiscal developments

The very public falling out between President Trump and campaign stalwart and Tesla CEO Elon Musk has highlighted the real market risks associated with volatile personalities in public office. Despite some recovery on Friday, Tesla has lost over US$100 billion in market cap since the social media drama began, with Thursday’s move accounting for around half of the total daily fall in the US market.

More widely, coverage around Trump’s One Big Beautiful Bill Act (‘OBBBA’) continues, with most commentary being decidedly bearish on the fiscal implications of the implied rise in budget deficit, estimated to add up to US$3.8 trillion to the budget deficit over the next decade. However, a more balanced viewpoint suggests this fiscal position was well anticipated by markets. Assuming a 10% base rate of tariffs across US imports brings the impact on the US deficit down to between US$900 billion and US$2.3 trillion according to analysts at BCA Research, spread over 10 years. This compares to the pandemic response under President Biden of US$1.9 trillion spent in a year – OBBBA doesn’t look quite so dramatic in this context.

While Summer usually provides a pause for major market moves, this year may prove more volatile. The 90-day pause on reciprocal tariff rates expires on 9 July, whilst 12 August marks the end of China’s 90-day pause. There is pressure on Congress to increase or suspend the debt limit by mid-July, as President Trump’s OBBBA moves through the Senate.

European and Asian market movements

As widely anticipated, the ECB cut base rates by 25bps to 2%, the lowest level since 2022. This marks the eighth rate cut since July 2024, with Lagarde signalling that the ECB was ‘reaching the end of the monetary policy cycle’. The cut followed slowing inflation, with May’s reading coming in below target at 1.9%, down from 2.2% in April. Core inflation fell to 2.3% from 2.7%. Consensus expectations are for one more rate cut later this year, with some commentators calling for 50bps of further easing.

With European data having consistently surprised to the downside so far this year and a stronger Euro contributing to tighter monetary conditions, the path for the ECB does not look completely clear. European equities rose 1.0% in the week, with major European markets (Germany, France, Italy) all gaining modestly.

Japanese equities fell by 1.2%, continuing the country’s lacklustre market performance year-to-date. Continued concern around trade relations with the US, as well as deteriorating public finances and weak macro readings have weighed on investor sentiment. In Hong Kong, markets reacted to weaker macro reads from mainland China with hope that the government would continue to loosen policy. Equities rose 1.9% during the week, bringing the local currency performance to 14.8% YTD. Once again, sterling strength has dampened performance for UK-based investors.

Commodities

Gold remained relatively flat on the week, whilst oil rose (Brent +4.0%; WTI +6.2%) in response to news that the US and China were in dialogue around trade.

The week ahead

Wednesday and Thursday: US Inflation reads for May: CPI on Wednesday and PPI on Thursday

Our thoughts: Core inflation is expected to increase to 2.9%YoY from 2.8% in April, whilst PPI is expected to be 0.2% MoM, up from -0.5%

Tuesday, Wednesday and Thursday: UK April employment data (Tuesday); Spending review (Wednesday) and April GDP (Thursday)

Our thoughts: Unemployment is expected to remain steady at 4.5% in April. The Chancellor Rachel Reeves will reveal her latest spending review on Wednesday – commentators will be looking for details on where the source of funds for committed projects (e.g. defence and healthcare) is likely to come from. Bond markets are likely to provide a good sense of investor appetite for the Chancellor’s plans. GDP growth is expected to have slowed slightly to 0.6% in April, from 0.7% in March.