2 April 2025: Starmer still believes that he has some influence over Trump

The Prime Minister repeated his opinion that he will be able to negotiate with Donald Trump to avoid tariffs being imposed on UK exports to the U.S. He believes that because UK/U.S. trade is roughly balanced, the imposition of tariffs would be counterproductive.

However, the Chancellor told her Cabinet colleagues that if the UK is subjected to Trump’s infatuation with tariffs to make the U.S. the manufacturing powerhouse it once was, the country’s economy would likely suffer.

It is unclear what exactly Trump will announce, but it’s believed his administration is critical of the application of VAT and could respond with a 20% tariff on imports from the UK.

Sir Keir Starmer did admit the UK is unlikely to avoid being hit by import taxes on goods going into the US, despite the two countries' so-called ‘special relationship’, warning the “likelihood is there will be tariffs” and that “nobody welcomes that”.

Rachel Reeves, who spoke to her US counterpart, Treasury Secretary Scott Bessent, yesterday, said that “global tariffs will have an impact on the UK as an open trading economy” and that “securing a deal could mitigate some of those effects”.

Addressing the Treasury select committee, Professor David Miles, from the Office for Budget Responsibility, said if 20-25% tariffs were imposed on the UK, it could “knock out all the headroom that the government currently has”.

Business secretary Jonathan Reynolds told the BBC, “the UK is well-placed to agree an economic deal with the US” and “talks would continue beyond today’s announcement”.

Reynolds added that the “business community wants to see the government take a calm, cool-headed, and pragmatic approach to discussions with the US”.

The issue of tariffs is exercising the thoughts of the entire cabinet, with the Foreign Secretary telling the House of Commons yesterday that the UK must “prepare for the worst” as “intense conversations” continue on a possible deal.

David Lammy told MPs: “It’s hugely important at this time that we continue the intense conversations we’re having with the US administration on getting an economic agreement, but of course we prepare for the worst, all options remain on the table.

Bank of England MPC member Megan Greene spoke yesterday of her fears over public expectations for future inflation.“I think inflation expectations do remain anchored, but I think it is a concern that they’ve been rising for the past six months,” Greene told a conference hosted by the British Royal Economic Society.

Greene feels that the imposition of tariffs will prove to be disinflationary for the economy, but given the uncertainty surrounding the decision, the modelling that is currently taking place needs to be “taken with a pinch of salt.

The financial markets are seeing increased volatility overall as speculation continues to swirl around Trump’s announcement, which is scheduled for 9 pm UK time this evening. The pound stayed close to the 1.2920 level yesterday as traders waited to see what would happen later. It opened at 1.2917 and closed at 1.2922.

FOMC member Thomas Barkin told reporters yesterday that the Federal Reserve's current "moderately restrictive" monetary policy is right for an environment with an abnormal amount of uncertainty and fast changes taking place in U.S. government policy.

The Richmond Fed president did not directly address the potential fallout from President Donald Trump's tariff announcement later today.

Like other Fed officials of late, Barkin was at least entertaining the idea that the suite of tariffs being rolled out by Trump could lead to higher-than-expected inflation, though the impact of that could also be offset by tax and regulatory policies still to come.

"In the context of recent high inflation, one could imagine more of an impact on prices," Barkin said. "But no one knows where the tariff rates will finally settle or how affected countries, businesses and consumers will respond."

Regardless, the new administration's policies were now "centre stage" and moving fast, Barkin said, leaving businesses and consumers unsure of what might happen, for better or worse.

The direction of expected changes on things like tariffs, immigration and taxes may become known, but the net effect remains up in the air, likely making businesses and consumers cautious about spending and investment plans.

"Sentiment matters. For consumers and businesses to spend and invest, they need to have a certain level of confidence," Barkin said. "For credit and equity markets to finance those investments, they need stability. And, for now, an uncertainty-driven drop in sentiment looks like it could quiet demand."

The Fed, under its chairman, Jerome Powell, has decided that it needs to take a back seat until it can figure out a path for monetary policy that will allow it to fulfil its mandate, notwithstanding the constant flow of fiscal changes that are being announced.

Barkin’s FOMC colleague Austan Goolsbee, from the Chicago Fed, told the Financial Times that “If you start seeing market-based long-run inflation expectations start behaving the way these surveys have done in the last two months, I would view that as a major red flag area of concern.”

Last week, the Fed raised its inflation outlook and slashed its growth forecast as US President Donald Trump’s tariffs cascade across the world’s largest economy.

Still, the Central Bank’s chairman expressed confidence that inflation expectations remain in check, citing a subdued outlook in markets. The five-year rate shows where the market feels the five-year rate will be in five years. a measure of markets’ assessment of price growth over the second half of the next decade is 2.2%. In contrast, consumers in the Michigan poll forecast inflation of 3.9 per cent over the long term.

As several FOMC members provided their thoughts on the current monetary and fiscal landscape, Fed Governor Christopher Waler chose to discuss the shrinking of the Central Bank’s Balance sheet over the past eighteen months.

Waller prefers to leave the pace of the run-off of maturing assets as it is, without replacing them as a matter of course. "Slowing or stopping run-off will be appropriate as we get closer to an ample level of reserves."

"In my view, we are not there yet because reserve balances stand at over $3 trillion, and this level is abundant."

"No evidence from money market indicators or my conversations that the banking system is getting close to an ample level of reserves."

The dollar remained in a narrow range yesterday, with traders not willing to anticipate either what Trump will propose later today or the market's likely reaction. It traded in a range between 104.27 and 104.02, closing at 104.22.

ECB Governing Council member, Isabel Schnabel and the Central Bank’s President Christine Lagarde close to ignore what is taking place on the other side of the Atlantic Ocean, preferring to concentrate on issues over which that have a semblance of control.

Lagarde followed up her speech on the need for the European Union to exert its financial independence by creating a payment platform to rival those from the U.S., which are currently dominating that particular landscape by trying to allay fears that the advent of AI technology would create an “unemployment armageddon”.

Speaking at the ECB's Transformative Power of AI conference, Lagarde said that research has shown that only "about 5% of jobs in advanced economies meet the criteria for high automation." She revealed that new data indicated that AI could benefit "high performers" while "less productive workers see zero improvement."

Lagarde raised the issue of AI increasing labour inequality, with higher-skilled workers being better equipped to utilize it, resulting in higher demand for such skills on the job market as opposed to less-qualified individuals.

Meanwhile, European Central Bank board member Isabel Schnabel spoke of her fear that the eurozone's economic recovery may have been held back by households' "misperception" of inflation and income, which has made them reluctant to spend.

As inflation moves closer to the Bank’s 2% target and wages remain fairly static, consumers should feel more confident to make larger, more long-term purchases.

"Over the past three years, real private consumption has increased more slowly than real disposable income," Schnabel said during a lecture on financial literacy in London. "This can be partly explained by household misperceptions of their real income developments"

She added that real income grew in over half of all households in the euro area last year, but that an ECB survey of consumers showed that only 11% perceived that increase.

The net percentage of pessimistic households is higher for poorer and less financially educated households, the survey showed.

"This implies that lower inflation due to restrictive monetary policy generally had a weaker impact on consumption due to such misperceptions, dampening the recovery," Schnabel added.

Germany's manufacturing sector showed signs of recovery in March, with its first production increase in nearly two years, a business survey showed on Tuesday.

The HCOB German Manufacturing PMI compiled by S&P Global rose to 48.3 in March from 46.5 the previous month, taking the index to its highest level since August 2022, although remaining below the 50.0 threshold indicating growth.

The uptick was primarily driven by the intermediate goods sector, while production in the investment goods sector remained stable, and the consumer goods sector saw a slight decline, the survey showed.

France also announced some marginally better news for investors, publishing data which showed that its public deficit was 5.8% last year, which was lower, albeit only slightly, than the previous estimate of 6%.

The euro was also in a holding pattern yesterday as it drifted between 1.0830 and 1.0781. With the announcement to come from Donald Trump later and the release of the March employment report on Friday, the second half of the week should see greater volatility.

Have a great day!