28 April 2025: Pension funds believe that the UK is “undervalued”

Rachel Reeves has returned from Washington without having secured a trade deal with the Trump Administration, and while both sides have had nice things to say about each other, a deal still appears to be some way off.

Since Treasury Secretary Scott Bessent is working on deals with several of his country's largest trading partners, the UK will have to “wait in line” until its turn comes around.

It has been suggested that Trump may well be delaying the negotiation until he can announce the date of his state visit to the UK, which is currently slated for September.

Later this week, the Prime Minister will receive two pieces of information which will show him how the country believes his Party is performing in Government. It is expected that in the local council elections and a by-election in Runcorn and Helsby on 1st May, Labour may fare poorly.

The Labour Party will gain relief no matter the results, from two directions. First, the Conservatives have made very little headway since last July and do not expect to challenge in Runcorn, even if Reform UK do perform well, and, second, having an 80+ seat majority will soften the blow of any adverse results while the Party’s credibility is in doubt in its first couple of years in power.

The Chancellor is facing further pressure from millions of public sector workers following recommendations that they should be offered a 4% pay rise.

The proposal has been put forward by the independent pay review body, which represents 514,000 teachers, for the rise to be close to 4%.

Meanwhile, the body acting on behalf of the 1.38 million NHS workers has put forward a 3% increase.

Efficiency savings are expected to be suggested to help schools and hospitals fund the pay rises. Police officers, prison officers and soldiers are also expected to be offered a salary increase.

It comes as the Government borrowed almost £15 billion more because of the rising costs of benefit spending, along with public sector pay rises last year.

The Treasury has previously warned ministers that if pay review bodies recommended pay increases, the money would have to come from the budgets already in place.

A spokesperson for the NHS said: “This will go down really badly. “These are people who haven’t had a lot given to them in recent years, and we know that nurses are gearing up for some kind of industrial action, unions are very upset, and it is going to be unrest all over again.”

The Institute for Fiscal Studies said: “Paying staff appropriately will be critical if the Government is to deliver its promised improvements to hospitals, schools, prisons and the police.”

The Bank of England will publish its quarterly report this week, it is expected to announce concerns about growth, possibly downgrading its forecast for full year GDP again, while inflation remains controlled.

The pound rallied to a high of 1.3348 last week but fell back to reach a low of 1,3278 before buyers emerged later in the week, lifting it to close at 1.3330.

With the beginning of a new month later this week, the spotlight may move away from tariffs, at least for a few days, while speculation mounts about the April employment report, which is due for release on Friday.

It has been a case of “the boy who cried wolf” for several months, certainly since the start of the year, as traders, investors and economists have been searching for the beginning of the downturn in the economy, which may eventually lead to a recession.

However, the Federal Reserve remains fairly sanguine about the prospects of a significant downturn in activity since it remains preoccupied with inflation, particularly in light of the tariffs that the Trump Administration has levied on almost every import into the U.S.

The current estimate for the headline number of jobs created in April is 130k. While that is significantly lower than March, it will still signify a level of growth that will satisfy the Fed’s current policy of not rushing into cutting rates.

The market is unsure of the next change in monetary policy, with some economists feeling that if tariffs cause a surge in inflation, Powell and his colleagues on the FOMC may feel justified in raising the Fed Funds rate.

Major ports have reported a significant fall in the level of imports currently flowing into the country by sea. This is due almost entirely to the tariffs that still exist on goods coming from China.

Despite soothing words from members of Trump’s cabinet and possible moves to protect Fed autonomy from Congress, the President continues to name-call the Fed Chairman.

In an interview on Fox News over the weekend, Trump again labelled Powell a “major loser” and urged immediate interest rate cuts.

Despite the rhetoric, President Trump backed away from his threats to remove Federal Reserve Chair Jerome Powell. That could end up serving a political purpose if the US economy turns south, according to some Fed watchers. "Firing Powell would make it much more difficult to use him as a scapegoat," RBC Capital Markets analysts said in a note this past week.

"It will get much harder to deflect the narrative around bad economic/market outcomes away from tariff policies."

Many economists expect the US economy to slow, or perhaps even descend into recession, as the Trump administration rolls out new tariffs on many of its trading partners, even if it can strike new deals with China or other large countries in the months ahead.

The dollar index has remained volatile, reacting to every comment from the White House.

Last week, it traded between 99.92 and 99.30, admittedly a relatively narrow range, but it currently lacks direction given the competing forces that are driving it. It eventually closed at 99.59.

The IMF has praised the German fiscal stimulus package. At its spring meeting, the International Monetary Fund highlighted the positive impacts on the German economy.

It will allow investments in defence, transport, energy grids, schools, sporting facilities and climate protection.

This could then at least partly offset the increased drags caused by the international trade conflict and global uncertainty, said Oya Celasun, deputy director of the IMF’s European Department, at the organisation’s meeting in Washington.

The Fund particularly praised the special fund for infrastructure, saying that the package is likely not only to boost growth in the near term, but also to have a long-term impact.

At the same time, it urged Germany to embark on reforms, stressing that the most important thing was to cut red tape so that the special fund could achieve its full impact. Additionally, the IMF said Germany should help more women work full-time.

German Finance Minister Joerg Kukies told Reuters on Friday that Germany is likely to ask the European Commission for an exemption from European Union borrowing limits to increase defence spending in the coming years without breaking EU rules.

Meanwhile, the European Union and United States are far from reaching a deal on tariffs, France's economy minister said Thursday, as the bloc seeks a way out from trade tensions with Washington.

The EU has not been spared from tariffs, and a 90-day pause on even higher rates for goods from the bloc is due to expire in early July.

“We’re not going to hide the fact that we’re still a long way from an agreement,“ said French economy minister Eric Lombard in an interview with journalists in Washington.

But he maintained that talks with US officials were warm. He said he met this week with the director of the White House National Economic Council, Kevin Hassett, US Commerce Secretary Howard Lutnick and Treasury Secretary Scott Bessent.

In an interview on Friday, ECB President Christine Lagarde remarked that the escalation in commercial tensions complicates the prospects of inflation. Lagarde underlined that the duties being imposed have triggered exchange rate fluctuations and still influence import prices and damage the supply chains, while the impact on inflation is uncertain.

Geopolitical tensions present bilateral inflation risks regarding energy markets, trust and investments.

ECB Governing Council member and Finnish Central Bank Governor Olli Rehn played up the chance of another rate cut, the eighth in the past twelve months, last week. He feels that while growth may take a “big hit”, inflation is still in a downward direction, which will allow the Central Bank to support the economy.

The single currency appears to have solid support at 1.1310, having made a low at that level three times recently. Last week, it reached a high of 1.1397 before settling back to close at 1.1377 as ranges narrow, but volatility remains high.

Have a great day!