Reeves stuck between a rock and a hard place as tariff tape bombs continue

DIGEST – The Spring Statement saw the UK’s grim macroeconomic backdrop laid bare yesterday, as sentiment soured on news of auto tariffs. Today, a busy data docket lies ahead.

WHERE WE STAND – Focus fell primarily on the UK fiscal backdrop yesterday, as Chancellor Reeves delivered the ‘Spring Statement’.

Said statement turned out to be largely in line with expectations, with policies in keeping with those mentioned in the numerous pre-statement ‘sources’ reports that had taken up plenty of column inches in recent weeks.

As such, Reeves announced around £15bln of spending cuts in order to ‘balance the books’ once more, restoring headroom against this fiscal rules to the £9.9bln seen at the Budget last autumn. The fiscal backdrop, though, remains incredibly fragile, for three reasons:

• Headroom is just a third of the pre-covid average
• An 0.6pp rise in Bank Rate and Gilt yield expectations would entirely erase said headroom, half the margin of error seen six months ago
• GDP growth is now seen at just 1% this year, half the pace expected last October

With all this in mind, it seems something of an inevitability that the fiscal buffer will have been eroded once again by the time that the Budget comes round. Consequently, there is little chance of UK PLC managing to escape the current ‘doom loop’ of ever larger spending cuts, and ever greater tax increases, in order to meet fiscal rules which are continually at risk of being broken.

In an ideal world, we would change these very rules, in order to incentivise a more long-term view of the public finances, instead of never-ending short-term tinkering to ensure that PSNFL as a percentage of GDP is falling by the fifth year of the forecast period. The issue, however, is that Reeves lacks the credibility among market participants that would be required in order to enact such a change, without causing a significant adverse reaction, and likely spike in Gilt yields.

Reeves, in light of that, remains stuck between a rock and a hard place. The only question I have now is what will hammer the final nails in Reeves’s political coffin – either a further loss of market confidence, or increasingly inevitable manifesto-breaking tax hikes in a few months’ time?

UK markets, on the whole, took the Spring Statement in their stride, with Gilts digesting the statement more easily upon confirmation that the year-ahead issuance remit stood at £299bln, marginally below consensus expectations, and with a much heavier than expected tilt towards issuance at the front-end. Cooler-than-expected inflation data earlier in the day, with CPI having risen 2.8% YoY in February, also provided a bit of a helping hand, though with services inflation still running at 5.0% YoY, expecting anything beyond quarterly 25bp cuts from the Old Lady still feels overly-ambitious.

Outside the UK, yesterday proved a relatively subdued day for risk appetite, with said risk-off vibe spurred on by reports that President Trump would be announcing tariffs on automobiles considerably sooner than expected, which later turned out to be set at 25%.

Consequently, stocks traded somewhat softer on the day, on both sides of the Atlantic, as the S&P 500 snapped a 3-day winning run. I still favour a preference for rally selling here, with uncertainty on the trade front unlikely to dissipate any time soon, plus both earnings and economic growth expectations still needing to re-rate to the downside. In addition, the SPX gains seen at the start of the week came on volumes around 25% below the 20-day average, suggesting a distinct lack of participation, and conviction, behind the upswing.

Despite stocks facing headwinds, there was little semblance of haven demand elsewhere – Treasuries traded softer across the curve, the greenback continued to tread water around the 104 figure, and gold languished in the low $3,000s.

All of this, again, seems emblematic of a market not only lacking a major catalyst, but also one that seems stuck in a bit of a rut ahead of the 2^nd April tariff deadline. Next week, though, should be a biggie, with that ‘Liberation Day’ tariff announcement due, as well as the March US labour market report next Friday.

LOOK AHEAD – A fair bit for participants to get their teeth into in terms of scheduled events, today, while we also all continue to engage in our favourite hobby of headline watching.

On the data front, participants will digest the final read on fourth quarter 2024 GDP, which should point to unrevised growth of 2.3% on an annualised QoQ basis, as well as last month’s pending home sales data, and the weekly jobless claims report. In terms of the latter, the continuing claims print coincides with the survey week for the March jobs report.

Elsewhere, the Norges Bank announce policy this morning, where rates are set to be held steady at 4.50%, albeit with money markets – per the NOK OIS curve – discounting around a 1-in-3 chance of a 25bp cut.

Besides that, plenty of central bank speakers are on the slate, including 2025 Fed voter Collins, and the BoE’s resident uber-dove Dhingra. Furthermore, a busy week of US supply wraps up with a 7-year sale later on, before overnight Japan releases the closely-watched Tokyo CPI metric,  seen falling 0.2pp to 2.7% YoY.