Market Insight

Economic commentary

In February, we learned that UK consumer prices had risen by 3% over the 12 months to January, up from 2.5% in December. The Bank of England noted that inflation is making progress towards its 2% goal, allowing the Bank’s Monetary Policy Committee (MPC) to reduce interest rates by 0.25% to 4.5%, following similar cuts in August and November. However, they expect inflation to rise to 3.7% by the third quarter of 2025 as global energy prices increase; the MPC are watching closely for signs of longer-term price pressures, as they balance lower interest rates (helping households and businesses) with the inflationary pressure that tends to result.

The US Federal Reserve (the Fed) also faces a balancing act. It sees a fairly healthy jobs market, and inflation of 3% (within reach of its 2% goal); these positives reduce the need for further immediate interest rate reductions. On the other hand, President Trump’s attacks against the Fed’s policies and his skittish attitude towards tariffs and diplomacy have created economic and political turbulence, sending US consumer confidence to a four-year low. The Fed will go into its next monetary policy meeting on March 19th trying to balance these competing factors, although it is widely expected that they will keep interest rates unchanged in a range of 4.25-4.5%. The month closed with an awkward meeting between President Trump and President Zelensky of Ukraine, representing a milestone in the US administration’s ‘America First’ strategy. Government and business leaders in Europe and beyond have since rushed to understand a reality in which the US acts in a more withdrawn, more independent, and less predictable manner towards geopolitics.

Market commentary

In February, some excitement around the US market and big tech stocks faded as economic reality began to bite. A striking example is that of Nvidia, which despite in late February announcing 80% year-on-year profit growth, actually saw its share price decline 9% on the day; other US tech stocks that are ‘priced for perfection’ also saw substantial declines. Concerns about inflation and economic uncertainty added to the pressure. US stocks dragged down global stock market indices accordingly, given their substantial representation.

Ironically, the ‘America First’ tariff-laden strategy being deployed by the US has instead seen other stock markets enjoy much better performance. In China, investors chased technology stocks after the news in January that the AI model ‘DeepSeek’ could operate far more efficiently than some US models, lifting the whole sector. In Europe, some defence stocks saw substantial gains as markets expected higher government spending both on standing NATO armies and on direct support for Ukraine in a world where the US pulls back. In addition, European bank stocks did well on the back of resilient financial updates. As investors left US equities, they sought shelter in lower-risk bonds (representing loans to companies and governments), which pushed up the prices of many.

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