2025-05-19 07:04

Key takeaways The past week saw the US and China agree to substantially reduce tariffs for a 90-day period while working towards a deal. Although clearly positive news, the significant changes in tariff policy since early April are likely to make interpreting macro data tricky in the coming months. When the US government announced plans for reciprocal tariffs in early April, the initial 46% levy on Vietnam (later cut to 10% while trade talks continue) made it one of the worst affected countries. With market rotations continuing, there could be a case for investors to look beyond US large-cap dominance for upside in global small caps. Chart of the week – China’s tech-led rebound Is it deal-done and crisis-averted in investment markets? Last week’s agreement between the US and China to slash tariffs for at least the next 90 days is the strongest marker yet of a shift to policy de-escalation. In truth, investors have been alert to this theme since the market recovery began in the third week of April. But last week’s price action takes US stocks decisively above their “Liberation Day” levels. Market price moves naturally reflect a shift in investors’ assessment of the risks: lower probabilities now on bad outcomes, and higher probabilities on better outcomes. Even so, it still looks like average US tariffs will settle in the low teens, the highest rate we’ve seen in the post-war period. Macro damage has already been done. And the policy outlook remains ultra-uncertain. An important theme this year has been the dramatic rotation of the market narrative. The theme has moved from a universal belief in US exceptionalism in January to a US policy induced recession and worries about economic fragmentation in early April. Now it looks like something in-between. Markets will continue to spin-around. As for China, the US talks followed a new round of policy stimulus – including rate cuts, targeted easing, credit support, and support for financial markets. Chinese offshore indices have performed well in 2025 driven by strong returns in technology stocks, which continue to be a profit engine, with firms capitalising on DeepSeek-driven AI optimism. By contrast, onshore indices have been weaker, due to lower tech exposures and slightly higher valuations. Market Spotlight Euro vision With the Eurovision Song Contest beaming live from Basel to living rooms around the world last weekend, we bring other news from Europe – but this time on proposed developments in the bond market. Recent questions over the safe-haven status of US Treasuries have been a reminder that investors face limited substitutes given that Europe's fragmented debt markets fail to offer the depth and liquidity necessary to rival Treasuries. Moreover, structural imbalances between eurozone economies cause destabilising capital flows between “core” and “periphery” nations during stress periods. The proposal for European Safe Bonds (ESBies) offers a potential solution. In technical-speak, ESBies are the senior tranche of a securitisation vehicle backed by a diversified portfolio of eurozone sovereign bonds, with the junior tranche referred to as European Junior Bonds, or EJBies. They would command enhanced safe-haven premiums through cross-European risk pooling – signalling more market cohesion and serving as a risk-free alternative to German Bunds. They could represent a way of increasing systemic resilience, while addressing the global safe asset shortage and over-reliance on the dollar – just as US exceptionalism as the sole provider of safety is under scrutiny. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg. Data as at 7.30am UK time 16 May 2025. Lens on… Hard times The past week saw the US and China agree to substantially reduce tariffs for a 90-day period while working towards a deal. Although clearly positive news, the significant changes in tariff policy since early April are likely to make interpreting macro data tricky in the coming months. The lion’s share of survey data – aka “soft data” – for April weakened on the back of “Liberation Day”. But May is likely to see some recovery, especially in the context of resurgent US equities. However, it is worth taking a step back and remembering that even after the thawing of US-China trade relations, the average effective US import tariff has still risen to a post-WWII high. Accordingly, macro models suggest US growth will drop well below trend in the coming quarters. Hence, while “soft” data may stage a recovery, “hard” data are likely to weaken, especially given investment and consumer spending was pulled into Q1 to avoid paying tariffs, likely leaving an “air pocket” in Q2. In the absence of further positive policy news, weaker “hard” data could trigger some renewed volatility in risk markets. Efficient frontier When the US government announced plans for reciprocal tariffs in early April, the initial 46% levy on Vietnam (later cut to 10% while trade talks continue) made it one of the worst affected countries. As a fast-growing Frontier manufacturing hub, Vietnam’s goods trade surplus with the US has soared in recent years (2024: USD123.5 billion). That’s been driven by its popularity with western firms pursuing a “China Plus One” strategy of diversifying their supply chains. Like other Frontier markets, ultra-high trade policy uncertainty has caused volatility in Vietnamese stocks. But the market has rebounded well, and year-to-date Frontiers as a group have returned 8.9%, outperforming both developed (3.7%) and emerging (8.5%) markets. This positive performance is down to factors including discounted valuations, strong earnings growth, and local country idiosyncrasies that offer protection against macro pressures. In the case of Vietnam, foreign investment is expected to be sticky despite recent uncertainty, with the country’s expanding middle class, digital adoption, and urbanisation giving its economy structural resilience. Thinking small With market rotations continuing, there could be a case for investors to look beyond US large-cap dominance for upside in global small caps. The US S&P 600 small-cap index has lagged the S&P 500 by over 50% over the past decade. And while investors would be forgiven for losing patience by now, history suggests smaller firms can deliver big gains after spells out of favour. Take the 1993-2000 technology bubble. After a serious bout of small-cap neglect, the S&P small-cap index trounced the S&P 500 by 75% from 2001 to 2010. Small caps have a high beta to both local growth and borrowing. While 65% of US corporate borrowing comes from capital markets, it’s only 15-20% in Europe, making those firms more reliant on bank financing. Today, many global small-cap indices trade at a discount of close to 20% versus the last decade. Non-US small caps currently trade below their average 12-month forward PEs, with Hong Kong and UK small-cap PEs close to 10x – half the S&P 500’s 20.5x. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 16 May 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 16 May 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Market review Risk-on market sentiment strengthened last week as the US and China agreed to reduce tariffs to 30% on Chinese imports, and 10% on US imports into China for a 90-day period. US markets now anticipate two rate cuts by year-end, down from nearly three the previous week. The US dollar continued its modest recovery, while US Treasuries declined, alongside similar yield rises in German Bunds and UK Gilts. US and eurozone credit spreads narrowed. US equities surged, driven by technology, with European markets following, supported by strong Q1 earnings in financials and healthcare. Japan's Nikkei 225 posted modest gains as the yen were range-bound. Other Asian indices performed well, led by India’s Sensex, followed by Hong Kong’s Hang Seng, China’s Shanghai composite, and South Korea's Kospi. In commodities, oil prices edged higher, whilst gold retreated from previous week’s gains. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/chinas-tech-led-rebound/

2025-05-14 08:05

Key takeaways The US and China agreed to big reductions in effective tariff rates for the next 90 days, as trade talks continue. The USD was notably stronger, with DXY rising past 101. Rate differentials and data releases could regain market attention amid a de-escalation in trade tensions. The high-level trade talks between the US and China on 10-11 May were constructive, and both sides issued a joint statement on 12 May, delivering a significant breakthrough in rolling back tariff levels: The US will roll back its 125% tariffs on Chinese imports announced since 2 April to 10% for 90 days. The earlier 20% tariffs imposed on China for the fentanyl issue will remain in place. China will roll back reciprocal tariffs on the US to 10% for 90 days and lift nontariff countermeasures imposed on 2 April (retaliatory measures taken in relation to tariffs imposed for the fentanyl issue will remain in place). The reduction to a 30% tariff rate for China (20% fentanyl-related + 10% baseline) was better than the 80% that US President Trump hinted at before the talks (Bloomberg, 10 May 2025). This also came alongside positive official rhetoric. It was in both countries’ interest to prevent the effective trade embargo remaining in place. The immediate market reaction saw the USD strengthen against all other G10 currencies, in particular, the low yielding, “safe haven” JPY and CHF, as global equity market rallied, US rate cut expectations eased, and FX position adjusted. Source: Bloomberg, HSBC Source: Bloomberg, HSBC It is worth noting that the AUD (and NZD) did not capitalise against the USD but did make gains vs the EUR and safe haven currencies. One could make the case that the reduction in trade tariffs would have allowed the AUD to outperform in the G10 space, given its China linkages and positive correlation with risk appetite. But the USD is capitalising on reduced trade tensions, an appropriate mirror to its weakness as trade tensions rose. It suggests the USD could gain on evidence of progress in US trade talks with China (and others) but may remain vulnerable to any setbacks. Another aspect to note is the US retention of a 10% baseline tariff on China. This echoes the US-UK trade deal and suggests a 10% baseline tariff may be here to stay, irrespective of what else the US agrees with trade partners. The US Dollar Index (DXY) has been weaker than what its rate differentials imply (Chart 2), probably reflecting market concerns over US policy and structural issues. But if trade tensions are at least temporarily relegated down the list of market priorities, rate differentials and data releases could once again see renewed traction. This cyclical factor currently suggests the DXY could go higher. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/dxy-higher-on-us-china-trade-truce/

2025-05-13 12:02

Key takeaways The temporary rollback of US tariffs on Chinese imports from 145% to 30% and China tariffs on US goods from 125% to 10% represented a substantial de-escalation of trade tensions. We estimate the 30% additional US tariffs will translate into 0.9ppt drag on China’s GDP and expect the 90-day tariff reprieve will likely boost the front-loading of Chinese exports further in the next three months. However, the tariff pause is only a preliminary deal while the upcoming trade talks will likely be a lengthy and bumpy process. Hence, we don’t expect Chinese policymakers to slow down the policy support for domestic consumption and structural reforms to bolster home-grown demand. Navigating persistent global trade uncertainty, we stay focused on domestically oriented China’s AI innovation champions, including AI enablers and adopters in the ecommerce, social media, online gaming, software, smartphones, autonomous driving, and robotics sectors. We expect the Chinese market rally to broaden out to the consumption, financial and industrial sectors in the next phase of market re-rating. We remain overweight on Chinese equities, including quality SOEs paying high dividends and remain positive on Chinese hard currency bonds. Please refer to the full report for details about the event and our investment view. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/us-china-tariff-pause-supports-de-escalation-of-trade-tensions/

2025-05-12 12:02

Key takeaways The BoE cut rates to 4.25% in May, but a surprise three-way vote split cooled market expectations for future cuts. US-UK trade deal with few details immediately announced; most UK goods exports to the US will still face the 10% tariff. The GBP’s reaction was rather muted and is likely to move sideways against the USD in the weeks ahead. The GBP weakened slightly against the USD after the announcement of a US-UK trade deal, erasing an early gain amid the Bank of England’s (BoE) hawkish cut. Unlike the Federal Reserve (Fed) that paused rate cuts for a third straight meeting, the BoE decided to lower its key policy rate by 25bp to 4.25% on 8 May. The decision came in line with market expectations, but the vote dividing the 9-member monetary policy committee (MPC) into three groups was a surprise. Five of them voted for the move, while two preferred a larger 50bp reduction and another two voted to hold rates steady. The BoE did not change its forward guidance, reiterating “a gradual and careful approach to the further withdrawal of monetary policy restraint”. The UK central bank now sees slightly weaker inflation but stronger near-term growth. Its growth forecast for this year was raised to 1% (from its February projection of 0.7%) and that for next year was lowered to 1.25% (from 1.5%), while the outlook for 2027 was unchanged at 1.5%. However, with two MPC votes for a hold and no change to the BoE guidance, the tone was a little more hawkish than expected. The GBP strengthened modestly against the USD, as markets pared some rate cut expectations (and more so after the US-UK trade deal), currently seeing only two more 25bp BoE cuts this year (Bloomberg, 9 May 2025). As for the US-UK trade deal, which US President Trump noted will be “the first of many”, its benefit and scope appear to be rather limited, with few details immediately announced. Most UK goods exports to the US will still face the 10% tariff, compared to an average tariff of 2.2% previously. For now, the trade deal includes lower US tariffs on British steel and aluminium, from 25% to zero. Other benefits include lowering the tariff on British-made cars to 10% from 27.5%, but only for the first 100,000 cars entering the US. New reciprocal market access is granted on beef, which gives UK farmers a tariff free quota for 13,000 metric tonnes and the UK removed a tariff on ethanol entering the UK from the US. There are other elements that may benefit the UK aerospace and pharmaceutical sectors, in addition to some promises to ease some non-tariff barriers with more mutual investment, but details are limited, and discussions ongoing. On a positive note, the trade framework removes some uncertainty surrounding future trade relations between the two countries which should support business investment sentiment. But until other regions, especially the EU and China, conclude their negotiations, it will be difficult to judge the deal in isolation. The GBP sees muted reaction to the trade framework with the US. Part of the explanation is that the USD is capitalising on signs that US trade policy uncertainty is declining, thereby overshadowing the relief from a trade deal that might offer to the US economic outlook. It is also possible that the GBP is being hit by other domestic headlines, with the National Institute of Economic and Social Research (NIESR) pointing to UK fiscal policy headaches ahead (Bloomberg, 8 May 2025). All things considered, the GBP is likely to move sideways against the USD in the weeks ahead. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/gbp-boes-cut-in-a-3-way-split-and-us-uk-trade-deal/

2025-05-12 07:04

Key takeaways Recent weakness in the US dollar has been down to worries over US growth, high deficits, and an end of US exceptionalism. But it’s no secret that the US is keen on a weaker USD to improve trade competitiveness. Mexico’s growth engine is stuttering amid high policy uncertainty, with a slowing US economy adding to headwinds. But the good news is that these growth risks, combined with inflation consolidating below 4%, mean Banxico looks set to maintain its easing stance. Japanese equities have beaten global markets by 5 percentage points in USD terms year-to-date, but they’ve lagged by 30 percentage points over the past decade (MSCI Japan vs ACWI). Nonetheless, at Warren Buffet’s 60th and final Berkshire Hathaway AGM as CEO, he reiterated how much he likes them. Chart of the week – Stocks since ‘Liberation Day’ It took five weeks, but US stocks have finally recovered from the global market sell-off sparked by the ‘Liberation Day’ tariff proposals in early April. The relief rally has played out amid falling volatility, still-high valuations and profits expectations, tighter credit spreads, and a sense of calm in Treasury bonds. Put together, it suggests that recession isn’t priced anywhere in investment markets right now. But policy uncertainty remains ultra-high, and the July deadline to restore reciprocal tariffs still looms. So, what has driven this rebound? For a start, US economic momentum at the beginning of the year was strong. Facts about the labour market and profits – including a solid Q1 earnings season – remain good. There’s been some growth cooling, but nothing more than that – at its May meeting, the Fed concluded “economic activity has continued to expand at a solid pace”. Meanwhile, there’s a sense on global trade that we’re moving from ‘tariff escalation’ to negotiation. A more dovish tone from US leaders has helped, and constructive talks between China and the US could be a further boost for markets. Last week saw US-UK and UK-India trade agreements, and there have been accelerated talks between China, Japan, and South Korea. But despite signs of progress on trade, there is still cause for concern. In the soft data, US consumer and business confidence has fallen sharply in the face of uncertainty. And it could be that lagging hard data will eventually “catch down” with weak survey data in the coming months. While markets have rebounded, the underperformance of the US versus EAFE regions in Asia (particularly India and Japan), Europe, and Emerging Markets, reflects a ‘wait-and-see’ stance by investors and the ongoing risk that policy uncertainty could provoke further volatility. Market Spotlight An investment (h)edge Amid the recent pick-up in market volatility, traditional diversification strategies have not proved reliable, with stock-bond correlations going haywire at times. But one asset class proving resilient is hedge funds. A recent review by some alternatives specialists shows that typical balanced hedge fund portfolios have insulated against as much as 90% of recent market weakness. As expected, some hedge fund strategies have been well-suited to the conditions. Equity market neutral strategies in particular, tend to benefit from volatility, and they have performed well. Macro fund managers have also enjoyed some success, especially in trading rates and commodity markets. But net-long and long/short equity market strategies have faced a tougher test given the weakness in US stocks, and their performance has retraced sharply. Given that recent volatility has been partly driven by policy uncertainty, some investment specialists expect further volatility to come. Indeed, allocators may need to lean ever more heavily on their hedge fund portfolios in the coming years to maximise returns. For Q2, the environment remains tricky for many strategies, but some specialists are most positive on ‘equity market neutral long/short’ and ‘multi-strategy multi-portfolio manager’ funds. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg. Data as at 7.30am UK time 09 May 2025. Lens on… Plaza 2.0 by stealth Recent weakness in the US dollar has been down to worries over US growth, high deficits, and an end of US exceptionalism. But it’s no secret that the US is keen on a weaker USD to improve trade competitiveness. Back in the 1980s, it did it with the ‘Plaza accord’, a multilateral deal to weaken its currency. While a similar ‘Mar-a-Lago accord’ might not be achievable now, countries with large external surpluses might let their FX rates strengthen against the USD to smooth the way for new trade deals. Persistent surpluses lead to what’s known as large positive net international investment positions (NIIP) – a measure of an economy’s net external wealth. And Asian majors like Japan, mainland China, Taiwan, and South Korea have outsized NIIPs, which over time should put upward pressure on their currencies. But many Asian currencies have actually been weakening in recent years. The largest ever single-day gain in the Taiwanese dollar earlier last week may not be a policy-driven move. But the timing and the size of it have led to speculation about what it might mean more broadly for other external-surplus currencies. Could significant appreciation in the likes of JPY and KRW be the next big moves in FX? Mexico as a safe harbour? Mexico’s growth engine is stuttering amid high policy uncertainty, with a slowing US economy adding to headwinds. The previous week’s Q1 GDP data just eked out positive growth, after a big contraction in the prior quarter. But the good news is that these growth risks, combined with inflation consolidating below 4%, mean Banxico looks set to maintain its easing stance. The market is pricing in over 1.75% of cuts over the next year. Despite this, the Mexican peso has done relatively well against the US dollar this year, helping to cap inflation. This reflects Mexico’s robust macro fundamentals – including healthy fiscal and external balances, and FDI inflows amid nearshoring (which may speed up as firms leave China). And for those worried about tariffs, it should be remembered a big component of Mexico’s exports to the US are covered by the USMCA treaty, with negotiations underway to reduce the 25% rate for non-USCMA compliant goods. Some Mexico City-based analysts think the combination of a limited tariff impact, high real yields, significant rate cuts, and a widening domestic investor base set the stage for further strong performance of local currency government bonds. Still a Buffet favourite April saw oil prices dip below USD60/bbl for the first time since early 2021. This has come amid increasing concerns over the global demand outlook on the back of trade tensions, and some weaker US data. But OPEC+ policymaking has been a decisive factor. The cartel surprised investors in early April by announcing plans to significantly boost headline output in May. There is now speculation there could be an even higher output target for June, set to be decided next Monday. Why would OPEC+ do this now? The simple reason is that Saudi Arabia is frustrated with rising levels of non-compliance among members – with countries such as Iraq, Kazakhstan, and the UAE pumping well above their quotas. Perhaps the pain associated with a further fall in prices will force future discipline. It’s a risky strategy. But the implication is much lower oil prices than we have been used to in recent years. Just as 2025 inflation forecasts are being upgraded, the supply shock is welcome news for Western economies and major emerging markets such as India and China. And with inflation expectations closely tied to oil prices, the Fed has a bit more breathing space to cut rates. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg, IMF, IFS, MSCI, Datastream. Data as at 7.30am UK time 09 May 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 09 May 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Market review Risk appetite improved amid rising optimism for a de-escalation in global trade tensions. The US dollar was stable against a basket of major currencies. US Treasury yields rose modestly after some solid economic data, including ISM services and jobless claims figures. The Fed left rates unchanged, with Chair Powell emphasising that policy remains well positioned to respond when there is further clarity how the economy evolves, while noting risks of higher unemployment and inflation. Meanwhile, the Bank of England lowered rates by 0.25%. In equity markets, US stocks traded sideways following rallies in the prior two weeks. The Euro Stoxx 50 was largely unchanged amid mixed Q1 earnings, while Japan’s Nikkei 225 gained in a holiday shortened week. Other Asian markets were broadly higher, with a new round of Chinese policy stimulus bolstering the Shanghai Composite and Hang Seng, whereas India’s Sensex softened on geopolitical uncertainties. In commodities, oil prices rebounded, and gold posted decent gains in a volatile week. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/stocks-since-liberation-day/

2025-05-08 12:02

Key takeaways Sentiment in the UK plummets in an ‘awful April’ for the UK economy… …as global uncertainty is compounded by a flurry of domestic challenges for businesses, households, and the government. But there are green shoots of positivity including lower interest rates. Source: HSBC Uncertainty seems to be the only certainty The world continues to be gripped by US tariff policy and what it could mean for the global economy, but with so many questions still unanswered, uncertainty remains the dominant theme. A delay in the imposition of reciprocal tariffs until 9 July offers some hope that trade deals can be reached. Regardless of their outcome, US President Trump has made tariffs central to his presidency and therefore a full reversal of recent announcements seems unlikely. In the meantime, as economic data becomes available, it is increasingly clear that uncertainty alone coupled with a global slowdown may be the greater drag on UK growth than the tariffs themselves. The UK PMI survey for April reported its first monthly contraction in the UK economy since October 2023. External demand declined at its fastest rate since 2009 and confidence in future output growth fell to its lowest level in two and a half years (chart 1). Sentiment is currently comparable to other periods of significant uncertainty – the pandemic, the EU referendum, and the 2008 global financial crisis (GFC). Indeed, we have revised down our growth forecast for 2026, reflecting the weaker global backdrop, loss of confidence, and subsequent lower investment. Awful April April also marked an eventful month domestically. Data confirmed that the government overshot borrowing expectations in 2024/25. House prices fell 0.6% m-o-m in April as stamp duty thresholds were lowered. Businesses faced the long-awaited increase in employer’s national insurance contributions (NIC) and national living wage (NLW) amongst other input price rises. Meanwhile, households faced a broad based rise in the cost of living, including high water bills, energy prices, and council tax rises. Moreover, the median household disposable income was broadly unchanged in 2024 versus 2023. It is no surprise then that consumer confidence remains weak, particularly across lower income households (chart 2). It’s not all bad news More positively, beyond US policy, the UK is positioned to take advantage of opportunities globally from strong growth in the Middle East, to a trade deal with India, and continued discussions with the EU. While domestically, even without the rise in the NLW, earnings continue to rise in real terms and the labour market, despite the headwinds, is resilient. That is not to say it has not deteriorated: while surveys point to employment growth stalemate, notices of potential redundancies are within normal ranges. Consumer demand had been picking up in the first quarter, retail sales volumes increased 1.6% q-o-q, its best performance since 2021. Lower interest rates would also help businesses, households, and the government. Members of the Monetary Policy Committee have appeared more concerned with the new downside risks to growth and have noted the disinflationary effects from US tariffs (source: Megan Greene, Bloomberg TV, 22 April 2025) and associated declines in oil and gas prices. In our view, the Bank of England will continue its ‘steady as she goes’ cutting cycle throughout 2025, assuming that the global backdrop avoids a larger shock and recession. Domestic inflationary pressures are more acute, and although we expect the recent pick up in services price momentum to be temporary (chart 3), it remains too high to be consistent with the 2% inflation target over the medium term. We maintain our view that the Bank Rate will end 2025 at 3.75%. Source: Macrobond, S&P Global, HSBC Source: GfK, HSBC Source: Macrobond, ONS, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/uncertainty-weighing-on-growth/