05/04/2025 by Tony Redondo
President Donald Trump signed an aggressive and far-reaching “reciprocal tariff” policy last Wednesday. The heavily anticipated ‘Liberation Day’ trade announcement brought news of a 10% universal minimum tariff for imports to the US. For many countries that rate will be higher as ‘reciprocal’ tariff rates will apply instead of the 10% minimum. For the UK only the 10% minimum applies. For the EU, the rate will be 20% in total. China is a special case with its 34% rate in addition to the 20% tariffs previously announced. The tariffs are effective from today (5 April) and give Trump the flexibility to vary terms in either direction, opening up scope for bilateral negotiations. For Mexico and Canada previous announcements apply. The Office of the US Trade Representative laid out its approach, including the formula used to calculate the different tariff bands on its website.
Global stock markets reacted badly. US equities came under intense pressure, with benchmarks suffering their biggest daily drops since the height of the Covid pandemic in 2020. The US stock market is now down over 10% since Trump took office, the worst 10-week start under a new president in 24 years with sharp falls also recorded across the globe.
The first major retaliatory response predictably came from China which imposed 34% tariffs on US goods with China’s Ministry of Commerce stating, “The US practice is inconsistent with international trade rules, seriously damages China’s legitimate rights and interests, and is a typical unilateral bullying practice.”
All this begs the question. Is Trump unhinged or is there a ‘master plan’?
Some would suggest that Trump’s new tariffs aren’t a trade tweak but the first move in a full spectrum reset with Trump focused on the $9.2 Trillion US debt that matures in 2025. If rolled into 10-yr bonds, every 0.1% drop in the bond yield saves approximately $1B per year in interest payments so a 0.5% drop would save $500 Billion over a decade. The hoped for lower bond yields free up fiscal headroom, otherwise core spending gets crowded out by the higher interest payments.
Maybe, just maybe, Trump’s ‘master plan’ is to sweep in tariffs, spook the markets, a deliberate “detox” to cool the economy and cut refinancing costs despite sticky inflation and a cautious Fed with investors’ money exiting stocks and flooding into long-term Treasuries. In addition, tariffs also bring in revenue with some estimates suggest they could raise over $700 million within the first year. Combine this with the hoped for DOGE spending cuts and Treasury Secretary Scott Bessent may get a bit more room for manoeuvre.
Currency Exchange Rates Update
The Pound finished last week down over 1.5% against the Euro to hit its lowest level since last August.
The Pound had a wild week against the Dollar. On Thursday it hit its highest level against the Dollar since last October with a rise of over 2.3% to then experience a sharp reversal on Friday to end the week 0.35% down.
The ‘risk-off’ market sentiment helped the Pound gain over 3.7% on the week against the Australian Dollar and nearly the same against the South African Rand.
The dollar index dropped over 2% on Thursday, its worst day in almost ten years and to its lowest level in six months. The Bloomberg dollar index is down almost 3%, its worst start to a year since 2017.
The Euro hit its highest level against the Dollar since early October 2024 with its biggest daily jump in nearly five years last Thursday.
The markets increased their bets on further global monetary easing, including in the UK, where money markets now imply over 0.6% of BoE (Bank of England) interest-rate cuts over the remainder of 2025 from 0.53% cuts priced in before Trump’s announcement. The Federal Reserve is now expected to cut interest rates with three to four 0.25% reductions priced for this year, with the first cut likely in June.
UK
A poll by More in Common after the spring statement puts Keir Starmer’s Labour Party in third place with its lowest level since the general election. The Tories are in first place and Reform in second. Labour have lost a third of the vote they won last July and far from resetting Labour’s fortunes the sprint statement seems to have worsened them.
There was more good news for Nigel Farage and Reform UK as a 102-year-old record was broken. The 1 May local elections will be the first time since 1902 that the Conservatives or Labour will not field the most candidates at an election.
The IPPR (Institute for Public Policy Research) have warned that Trump’s 25% car tariff may put 25,000 UK jobs at risk. Trump announced a 25% tariff on all car imports to the US last week. The US is the UK’s largest trading partner with UK vehicle exports to America worth some £9bn.
The ASI (Adam Smith Institute) Wealth Exodus report calculates that non-dom’s face a 67% per cent tax raid starting 6 April, paying 45% tax on the profits their foreign companies make plus an additional 39.5% tax on their dividends, meaning paying an effective tax rate of up to 67% on their overseas companies. Chancellor Rachel Reeves’s crackdown on UK citizens whose permanent residences are abroad will come into force on Sunday (6 April). Reeves is pressing ahead with the changes despite warnings that they will further fuel the exodus of thousands of British-based entrepreneurs since Labour took office. Sam Bidwell, the ASI’s director of research and the report’s author said “Taxing the foreign businesses of non-doms at rates of up to 67 per cent is the kind of behaviour we might expect from an authoritarian regime – not from the birthplace of capitalism. These proposals are nothing short of a slap in the face to the wealth creators who invest, pay taxes and create jobs in the UK. It’s no wonder that so many of them are considering leaving for good.” One millionaire left Britain every 45 minutes last year, more than double the number in 2023. That’s more than 10,000 millionaires, who were contributing a disproportionate amount of tax and business activity who have left the UK last year. Only China suffered a bigger exodus.
The IFS (Institute of Fiscal Studies) warned the tax paid by companies in the UK has nearly doubled in the last 10 years with companies now paying over 25% of all UK tax receipts. In the run-up to last year’s election, Chancellor Rachel Reeves said Labour would become more “pro-business” than previous governments. But the IFS report, based on data by Thomson Reuters raises questions about the Chancellor’s record in office with a sharp increase from £114bn to £215bn driven by an increase in the rate of corporation tax. The current rate stands at 25%. The increase in employers’ national insurance will only increase businesses’ share of all tax receipts.
Oxford Economics warned ‘Awful April’ price rises will cause an ‘inflation surge’ with higher costs in everything from water to energy contributing to a rise in inflation that peaks at twice as high as the BoE’s 2% target rate. Other price increases include changes to council tax, stamp prices, TV licences, broadband and car taxes. The national minimum wage will also rise to £12.21 from Tuesday, taking a toll on costs for thousands of businesses plus Reeves’ £18 billion national insurance raid on employers’ contributions.
In January, the BCC’s (British Chambers of Commerce) Quarterly Economic Survey found optimism among firms plummeted to the same level as in the immediate aftermath of Liz Truss’s disastrous mini-Budget in September 2023. A fresh survey published last Tuesday (before Liberation Day) from the IOD (Institute of Directors) found that just one in ten business leaders were optimistic about the UK economy. Now, the BCC’s deputy director of public policy, Jane Gratton, has said “With further tariffs also hanging over the economy and the Employment Rights Bill (ERB) set to add £5bn to costs, it’s likely to get a lot worse. The government must show it understands the pressures firms are under and act now to lighten the load.”
S&P Global’s UK Purchasing Managers’ Index (PMI) for the manufacturing sector shows a further decline to its lowest reading in 17 months. Rob Dobson, director at S&P Global Market Intelligence, said “Companies are being hit on several fronts. Costs are rising due to changes in the national minimum wage and national insurance contributions, geopolitical tensions are intensifying, and global trade faces potential disruptions from tariffs. Although the impact on production volumes was widespread across industry, it was again small manufacturers that took the hardest knock.”
S&P Global’s UK Purchasing Managers’ Index (PMI) for the construction sector shows construction output drop for the third month in a row with sector confidence also falling to its lowest level since October 2023.
The BoE Mortgage approvals index for house purchases decreased again in February as consumer credit borrowing also fell.
USA
The US unemployment rate rose to 4.2% in March 2025, the highest level since November and slightly above market expectations of 4.1% but employment grew by 201,000, higher than the 135,000 new jobs the markets expected.
The Fed’s preferred measure of inflation came in higher than expected for February and the University of Michigan Consumer Sentiment Index fell to a 2-year low, whilst 5-year inflation expectations surged to 4.1%, the highest since 1993.
The US military has begun to upgrade its operations in Japan to a new “warfighting” command according to Defence Secretary Pete Hegseth, highlighting the Trump administration’s focus on China as its primary security challenge. Hegseth made his comments in Tokyo, the final stop on a tour of Asia-Pacific that went some way toward reassuring allies that it intends to remain engaged in the region.
The EU
The German headline inflation rate for March brought some relief for the ECB (European Central Bank), easing to a 2-year low. Across the eurozone, inflation also fell sharply from 2.8% to 2.3% in February. Germany’s import prices did surge 3.65%, the highest since January 2023, while retail sales rose 0.8% m/m, marking the biggest increase in five months.
France’s National Rally leader, Marine Le Pen, was found guilty of embezzling EU funds to pay party staff. Le Pen has been banned from politics for five years and handed a four-year prison sentence with two years to be served under house arrest with an electronic tag. Le Pen was also given a €100,000 fine. Le Pen stormed out of court before hearing the judge’s verdict. Le Pen’s exclusion may perversely improve her party’s chances in the 2027 Presidential elections. There has been a Le Pen (father and daughter) on the presidential ballot for decades. They’ve never won while her deputy, the 29-year-old Jordan Bardella, the enfant terrible of French politics, now has two years to build himself up.
Others
China’s factory activity expanded in March at the fastest pace in a year.
Global oil prices plunged by nearly 7% last week to its lowest level since 2021 on fears of a growing global trade war that could slow economic growth and reduce fuel demand and the unexpected decision by the OPEC+ countries to increase oil production more than planned.
Stranger than fiction
Tuesday was April Fool’s Day. Decent pranks included Heinz announced Dubai Beanz with a pistachio flavour; BrewDog announced Hot Beer as a change from cold beer; Terry’s came back with Chocolate Mint Toothpaste; and Love Island announcing that for their next series Majorca would be swapped for Essex’s Canvey Island.
Quote
Albert Einstein, “We cannot solve our problems with the same thinking we used to create them”
