June monthly market update - Reflections on May 2025

Equities rallied in May after the US and China agreed a temporary rollback on tariffs and economic data from the UK, US and eurozone came in stronger than forecast.

The FTSE 100 reached a two-month high, supported by solid corporate earnings and better-than-expected growth. Global markets also rallied at the beginning of the month after the US and China agreed to roll back tariffs for 90 days, easing fears of a global slowdown.

In a welcome boost for the government, the UK economy grew more than expected in the first quarter. GDP rose by 0.7% but growth could slow later in the year due to Trump’s tariffs and recent government tax increases.

The UK signed a new trade deal with the US, reducing some tariffs, although a 10% levy on most goods entering the US will still apply. Meanwhile, the UK and EU agreed to reset relations in a breakthrough trade deal, and the UK and India concluded a free trade agreement after three years of negotiations.

UK inflation rose more than expected in April, driven by higher energy and transport costs. Prices were up 3.5% compared with a year earlier, rising from 2.6% in March, which is the fastest annual increase since January 2024.

In response to growing economic uncertainty, the Bank of England cut interest rates from 4.5% to 4.25% – its fourth cut in the past year. Further reductions are expected, though there is uncertainty over the pace and scale. The Bank warned that higher tariffs would likely dampen growth and lower inflation.

The labour market showed further signs of weakness, with unemployment edging up to 4.5% and both payroll numbers and vacancies falling again.

US stocks recover from sell-off

US stocks recovered losses triggered by President Trump’s Liberation Day tariffs, helped by stronger-than-expected economic data and a solid earnings season. US inflation slowed to 2.3% in April, despite tariff disruptions. Although many of the original tariffs have now been rolled back, economists warn that the full economic impact may still be felt.

The US economy contracted in the first quarter – its worst performance in three years. GDP fell at an annualised rate of 0.3% between January and March, compared to 2.4% growth in the previous quarter. Imports surged early in the year as businesses rushed to stockpile goods ahead of tariff hikes.

The US Federal Reserve held interest rates steady between 4.25% and 4.5% in response to ongoing trade uncertainty. Trump has repeatedly pressured the Fed to cut rates, but it has held firm since its last cut in December.

The US job market remains resilient, with employers adding 177,000 jobs in April. The unemployment rate held steady at 4.2%, and year-on-year wage growth of 3.8% continued to outpace inflation.

Europe buoyed by trade optimism

European markets posted strong gains, lifted by upbeat earnings and optimism around trade. Stocks were also supported by Trump’s decision to delay the implementation of 50% tariffs on EU goods until July.

Eurozone inflation remained just above the European Central Bank’s (ECB) 2% target in April, at 2.2%. It is expected to fall below target next year, partly due to the impact of US trade policies. The ECB cut interest rates for the third time this year in April amid rising trade tensions and concerns over slowing growth. Another cut is expected in June.

While the eurozone economy performed better than expected early in the year, the announcement of Trump’s tariffs has since weighed on the outlook. The region grew 0.4% in the first quarter – double the pace of the previous three months – but is expected to slow in the second half of the year. Despite this, unemployment is forecast to continue falling.

Asia rallies on tariff rollback

Asian markets rose after the US agreed to cut tariffs on Chinese imports from 145% to 30% for 90 days. In return, China will lower its tariffs on US goods from 125% to 10%. The move came as Chinese factory output declined and reports of job cuts increased due to falling US demand.

China’s economy slowed in April, with weaker retail sales, property activity and investment as the trade war dragged on. Industrial output rose 6.1% year-on-year in April, down from 7.7% the month before. Deflation also remains a concern, with consumer prices falling for the third month in a row.

In response, Chinese policymakers announced new stimulus measures in May, including interest rate cuts and a major liquidity injection. China’s economy grew 5.4% in the first quarter, beating expectations. Authorities remain confident of meeting their 5% growth target for the year, despite warnings from economists that US tariffs could weigh on momentum.