Originally published at: This Week in Charts: A tough week for Rachel Reeves – InvestEngine Insights
The headline news in the UK this week was that inflation unexpectedly jumped to a 15-month high of 3.5% in April, up from March’s 2.6% and beating the 3.3% forecast. The increase was largely driven by steeper household energy costs, following a regulator-imposed cap rise, as well as heftier water bills, road tax hikes and pricier airfares. As a result, market expectations for further rate cuts this year have tempered, with traders now expecting one interest rate cut by November, with a 50% chance of a further cut by year end.
Underlying price pressures remain stubbornly elevated, too: services inflation climbed to 5.4%, surpassing both analysts’ 4.8% forecast and March’s 4.7% reading. In short, while consumers are feeling the pinch from rising bills and taxes, policymakers may be in for a longer wait before they can ease the squeeze on borrowing costs.
Source: Bloomberg
In a further blow to Chancellor Reeves, it was announced on Thursday that government borrowing in the UK unexpectedly climbed to £20.2 billion in April, up from £19.1 billion a year earlier and well above the £17.9 billion that economists had predicted. This surprise jump comes at a delicate moment for the Chancellor, with a major spending review looming next month and tighter fiscal targets on the agenda.
The rise in borrowing was driven mainly by increased public service and benefits spending, which outpaced the boost in receipts. Although tax revenues saw a lift from higher National Insurance contributions introduced in the Spring Budget, they weren’t enough to offset the higher outlays, leaving the deficit wider than expected.
Source: ONS
Over in the US, equity markets fell on Wednesday, as a $16 billion, 20-year bond sale drew tepid demand, despite the government setting the coupon rate at 5% – the highest since the bond’s 2020 reintroduction. The lacklustre demand underscored growing jitters around America’s ballooning debt load, especially as President Trump edges closer to winning congressional approval for his “big beautiful bill” of tax cuts.
Those bond market concerns quickly spilled over into equities, sending over 95% of S&P 500 components into the red on the day, and the overall market down around 1.5% in sterling terms. The broad nature of the selloff suggests concerns around government finances are impacting all areas of the market.
Source: Bloomberg
Despite the US market’s fall this week, the European market continued to climb. It has now outpaced the U.S. by more than 20% in sterling terms so far this year, driven by Germany’s recent €500 billion infrastructure and defence spending package, robust corporate earnings, lower valuations, and a weaker dollar.
Source: Bloomberg. Returns in GBP. Past performance is not indicative of future results.
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