June monthly investment update - Reflections on May 2025 and a look ahead

The 'on-off' nature of President Trump’s notorious trade tariffs continued in May – albeit with less volatility than we'd seen in the previous month.

If we step back to April for a moment, it was the month that he imposed (reciprocal) tariffs on countries worldwide - only to then pause them for 90 days, apart from China. In May, the President focussed on the European Union, as he announced he was placing 50% tariffs on goods from the region - only for him to pause them, shortly after, to July.

More constructively, May was also the month that saw the US and China back down somewhat from their public spat over 'said' tariffs, as representatives from the world’s two biggest economies met for talks in Geneva – hoping to bring resolution to the trade war.

It was interesting to see that in advance of the meeting, Beijing put measures in place to stabilise the country’s economy. Analysts, at the time, saw this as a sign that China was strengthening its position in preparation for those negotiations.

The meeting certainly proved fruitful, with reciprocal tariffs reduced from 125% to 10% (on US products entering China) and 145% to 30% (on Chinese products entering the US).

Stock markets reacted favourably to the news, seen by some as a 'de-escalation' of trade tensions. However, what no one was expecting (least of all the President himself) was the curve ball thrown by the US Court of International Trade who challenged the legality of some of President Trump’s 'imposed' tariffs. In possible retaliation, and in the now-familiar style of the President, he subsequently imposed 'higher' tariffs on steel and aluminium imports.

Investment markets, it seems, have become a little more 'desensitised' of late to 'on-off' tariff announcements, and the hope is we have already reached 'peak pain' when it comes to 'tariff turbulence'.

The 'ripple' effect is far reaching

There are repercussions to all of this tariff mayhem: economic data is becoming difficult to interpret as readings from periods 'before, during and after' April are likely to be distorted by their imposition on President Trump’s 'Liberation Day’.

From what we can gauge from recent data points, there is no sign of a significant pick-up in inflation so far (from 'imposed' tariffs). In fact, US headline inflation actually eased back to 2.3% in April. However, it wasn’t realistic to expect distortions to show up just yet - not least because most tariffs still haven't been agreed!

The US central bank (known as the Federal Reserve (or the Fed)) held US interest rates steady (in the range of 4.25%-4.50%) in May. The Fed’s committee members aired concerns about the potential for higher inflation, a rise in unemployment, and uncertainty around the impact of those 'infamous' tariffs.

Inflation, economic growth and interest rates

UK inflation jumped to 3.5% in April which was seen as a repercussion from the rise in the energy price cap (though Ofgem has announced it will be coming down in July). Given the knock-on impact to inflation from wage growth, investors will be more comfortable to see UK wage pressures easing - and falling job vacancy numbers give us more confidence that pay increases will indeed soften in the months ahead.

The rise in both National Insurance and the minimum wage in April, will undoubtedly be putting pressure on company profit margins, and continued wage growth could lead firms to put up their own prices in response – creating a possible 'knock-on' impact to future inflation readings.

Of course, bigger pay packets can have a positive impact if those wages are recycled back into the economy as people spend more. Higher retail sales figures for April (boosted by sunny weather conditions) may indeed, have been one such beneficiary.

We’ve said before that the UK economy needs sustainable long-term growth and it’s the number one priority of the current government. Somewhat reassuringly, UK quarter one GDP growth proved better than expected but this now needs to be sustained, and recent economic surveys have suggested growth has slowed.

As we'd expected, the Bank of England reduced interest rates by 0.25% in May, but with a twist. The decision wasn’t unanimous. Of the nine members of the Monetary Policy Committee, five of them agreed with the decision to cut rates by 25bps, whilst two of them voted for a bigger cut, and two others voted for rates to be left unchanged – highlighting just how uncertain the outlook is at the moment.

More cuts could still be on the cards for 2025, though the governor of the Bank of England himself, said at the time of the cut, he was "still of the view that the path, gradually and carefully, is downwards". Now compare this to other countries and you’ll see the picture is far from uniform anywhere. For example, the US hasn’t reduced interest rates at all so far this year, China has only made a small reduction to its lending rates, and yet the European Central Bank has cut rates multiple times, so far, in 2025.

Markets update – a mixed bag

Stock markets rose further in May following the sharp falls (and subsequent recoveries) seen in early April following those 'initial' US tariff announcements. However, the rise of nearly 5% for global shares in May was not matched by fixed income markets, sadly. Notably, there was a disappointing performance from US government bonds and some of that impact rippled out to other bond markets including the UK's own government bond market (gilts).

President Trump's 'One Big Beautiful Bill' (passed by a single-vote majority by the House of Representatives in late May) is likely to have an impact on US bond markets. It’s anticipated that its contents, if fully approved, could add $3.8 trillion to US debt by extending tax cuts, reforming welfare, and ambitions to fuel US economic growth. However, bond investors appeared alarmed by the size of potential future government debt - in a way reminiscent of the UK's mini budget crisis of 2022.

US bonds were further unnerved when a credit agency downgraded the credit rating they apply to US government bonds – though similar action was taken some years ago by other agencies.

With a lot of big announcements still to come from the US regarding significant future tariffs and reaching agreement on the budget bill (mentioned earlier), markets remain in something of a 'holding pattern' for the time being. On a positive note, stock market gains from May have helped to restore investor confidence, for now, at least. But we can’t get away from the fact that it has been a disappointing period, to date, for bond investors.