If the first quarter of 2025 was a step into the unknown, the second quarter has proven even more so. On/off tariffs remain part of the U.S. president’s arsenal, but now they’ve been joined by Tomahawk missiles. An Israeli strike on Iran was always a possibility, but direct U.S. involvement has brought another dimension. While the immediate aftermath of the conflict has resulted in a ceasefire, longer-term issues are unresolved, in our opinion. The price of energy remains particularly vulnerable should Iran decide its options are limited to the future restriction of marine traffic through the Straits of Hormuz.
The anticipated path of interest rates perhaps looks a touch clearer. Markets appear to be anticipating cuts even though inflation still looks sticky in most developed economies. The Bank of England cut by 0.25% in May despite Consumer Price Index (CPI) inflation being 3.4%, a mere 0.1% lower over the previous 12 months; it remains noticeably above its target of 2.0%. With government spending driving increased borrowing, we wonder whether private sector activity faces being ‘crowded out’?
In the U.S., Federal Reserve (Fed) Chairman Powell has, so far, resisted the president’s crude attempts to get him to reduce rates. It is to Mr Powell’s credit that he understands the Fed’s mandate better than Mr Trump and while Trump targets Powell individually, the president appears oblivious to the fact that Fed interest decisions are taken by committee. Thus far, markets have been remarkably sanguine about a background where economic growth is tepid, stagflation is a real possibility and geopolitical issues continue to loom large. Unless inflation is acquiescent, rate setters may struggle to justify cheaper borrowing.
