UK inflation slows, all eyes on budget

The latest data from the Conference Board came to back the mounting concerns among Americans regarding the future of the economy and inflation that a set of Michigan numbers have already warned about. The consumer confidence in this particular set of data plunged to a four-year low and inflation expectations jumped on tariff uncertainty. The Federal Reserve (Fed) Chair Jerome Powell has recently pointed at the strength of the US data, but the growth forecast are turning sour at a scary speed and waning sentiment will likely impact hard data – growth, employment and inflation – in the foreseeable future. On the other side of the Atlantic Ocean, the German data tells the exact opposite: business optimism in Germany hit the highest levels since last summer as the massive government spending that the German government agreed to unlock brings hope across manufacturers. As such, the convergence in sentiment between the two continents continues to develop, be confirmed by data and back the rotation trade.

The Stoxx 600 index rebounded yesterday after a three-session correction while US equities traded with no clear direction after a strong Monday rebound. The S&P50 closed flat. The doji candle formation typically hints at uncertainty and hesitation about where the US valuations should be headed next. In fact, investors are looking at April 2nd – the Liberation Day - hoping that the tariff announcements will bring more clarity. But April 2nd could be another day of imposing and pulling back tariffs in the continuation of a hectic and unpredictable trade policy that the White House follows since Trump tool office in January.  

Valuation-wise, the rebound in European stocks sure narrowed the valuation gap with the US counterparts but the Stoxx 600 prints a PE ratio of around 17 today versus the S&P500 that still prints a PE ratio of near 29. The question is whether we could see a further convergence between the two. The answer is – it depends. One of the major boosters of sentiment since the start of the year was the decision from the European governments to unlock massive spending on infrastructure and security. The latter weighed heavier than the tariff fears and boosted growth expectations. The European spending narrative is still in play but is now widely priced in. Therefore the European investors will be facing the tough reality of the tariff game in the coming weeks and the latter could slow the rally that we saw in the European equities and the euro over the past three months. What Europe needs (what Europe really, really needs) is to turn infrastructure and security spending into growth, while the US growth slows. In summary, the rotation trade is probably not over but could be shaken by a new tariff wave in the short run.

Budget day

In the UK, the tariff fears are amplified by the fact that the UK won’t benefit from the ample budget spending that the continental European peers will. On the contrary, the spending hopes for the UK have been crumbling as borrowing costs keep rising and decrease Rachel Reeves’s fiscal headroom. The impact of tax rises, on the other hand, hit appetite and growth. And the Bank of England (BoE) is not in a hurry to provide relief with rate cuts pointing at global and trade uncertainties. Released this morning, the latest hinted that inflation in the UK came in softer-than-expected, providing a minor relief before today’s Budget Announcement.

But we already know that Rachel Reeves will announce a smaller ‘spending envelope’ later today; she is expected to announce a £10bn cut in day-to-day government spending. The smaller the envelop, the bigger the impact on sterling.

Partial truce?

News of a partial truce between Ukraine and Russia in the Black Sea saw limited reaction from oil traders. In theory, a truce or a partial truce should ease sanctions on Russian oil exports and have an easing effect on oil prices. But oil prices are relatively steady and US crude continues to test the $70pb resistance, hinting that the market is not buying the news for now. Yet the rising hope of a potential truce increases the downside risks and should temper appetite, along with the supply/demand gap pointing at cheaper oil in the medium term.

Elsewhere, copper futures on Comex advanced to an ATH yesterday as US buyers rush to buy copper before tariffs hit. But because copper is a barometer of global growth and the latter is being pressured by an escalating trade war, it’s just a matter of time before we see correction in copper prices.