May Market Highlights: Trade Developments, Interest Rate Moves & Economic Growth

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Market Overview

After the chaotic start to the year, it was refreshing to see relative calm permeate through markets in May. While the headlines were still dominated by US President Trump’s tariff announcements, investors took the latest news in their stride. The frequent U-turns over trade policy have become the norm, with tough talking leading to market falls, and subsequent backtracking resulting in market recovery. While many governments attempted to strike a trade deal with the US on tariffs, the UK was first in the queue. This good news followed by further UK trade deals announced with India and the EU. The Bank of England (BoE) cut interest rates by 0.25% to 4.25%, as anticipated, but a mixed picture from inflation and wages data means it may be some time before another downward move. One market catalyst on the horizon is Trump’s “big, beautiful bill” and tax cutting policy. Many fear this budget reconciliation bill would widen the already-stretched US budget deficit, with members of Trump’s own party using phrases like “debt bomb” to describe the bill.

UK government looks to rebuild its trade platform, growth outlook more positive

BoE Governor Andrew Bailey called for the UK to “rebuild” its trade relationship with the EU in May, after the UK celebrated the US-UK trade deal. In his speech, Bailey avoided taking a view on Brexit, but argued a closer relationship between the UK and the EU would help the UK economy and inflation.
However, the US-UK trade agreement was thrown into doubt after the US Court of International Trade blocked Trump’s “Liberation Day” tariffs, stating he “exceeded his authority” when imposing the sweeping levies. We await further developments in June.
The International Monetary Fund (IMF) upgraded its UK growth forecast for 2025, predicting the economy to grow 1.2% this year, rising to 1.4% in 2026. However, it warned that the Chancellor must hold firm on tax and spending rules.
The annual inflation rate jumped from 2.6% in March to a higher-than-expected 3.5% in April, the highest level since January 2024. The increase was largely attributed to higher utilities and housing prices.
The economy grew at a faster-than-expected rate in the first quarter of 2025. Gross domestic product (GDP) expanded 0.7%, more than the 0.6% forecast in a Reuters poll and up from 0.1% in the final quarter of 2024. Strong improvements in services, investment, and exports drove the figure.

All eyes on Trump’s “big, beautiful bill,” amid concerns over the financial health of the US economy

The House of Representatives passed Trump’s wide-ranging “One Big Beautiful Bill Act” on 29 May. The package makes past tariff actions permanent and is expected to widen federal deficits.
US real GDP contracted by an annualised 0.2% in Q1 2025, as softer government spending offset resilient consumer outlays. Imports continued to skew the numbers as businesses stockpiled inventories earlier this year to beat Liberation Day tariffs.
Moody’s became the last of the three major credit rating agencies to downgrade US government debt, known as treasuries, from the highest possible credit rating, amid concerns over US federal debt and fiscal deficits.

Global equities delivered solid returns over May and reminded investors not to discount US technology stocks after a shift in positive investor sentiment bolstered equity prices. However, such positivity seemed to hinge on Trump’s mood, especially around hopes for trade deals with the EU and China. The outlook is arguably more nuanced than at any time over the last decade, and it’s unlikely one particular investment approach or market will dominate the immediate future, as US tech stocks have over the past decade.

Looking to bond markets, the ‘safe haven’ status of government bonds was brought into question in May, after Moody’s historic downgrade of US Treasuries from AAA, meaning it no longer boasts the highest quality debt in the world. On the back of the downgrade and tax cuts, ten-year US Treasuries ended May yielding 4.4%, up from 4.16%. In the UK, Chancellor Rachel Reeves has other problems as borrowing for the year to 31 March 2025 was £11bn higher than forecast. The ten-year UK Gilt had a similar move after starting May yielding 4.44% and ending the month with a yield of 4.65%. Germany’s ten-year Bund was fairly flat, but the ten-year Japanese Government Bond jumped and yielded 1.49% by the end of the month.

In contrast, commodity markets were relatively calm. Gold was flat on the month, with one ounce starting at $3,319 and finishing at $3,315. Brent crude oil price movements were also subdued, rising less than $1 in May to finish at $63.90. In currencies, sterling had a good run on stronger data, while the dollar weakened after Congress passed Trump’s tax and spending bill. The next step is for the bill to be passed in the Senate.

EU looks to tackle US trade tensions

Trade tensions escalated after the White House confirmed plans for a 50 % tariff on all EU goods from 1 June. The deadline was pushed back to 9 July after Trump’s call with European Commission (EC) President Ursula von der Leyen, who said the bloc was “ready to advance talks swiftly and decisively”.
The EU stated it “strongly” regrets President Trump’s surprise plan to double US tariffs on steel and aluminium, with the EC saying the latest move on tariffs “undermines ongoing efforts” to reach a deal.

The EC reduced its forecast for economic growth in 2025 to 0.9% from the 1.3% forecast at the end of 2024. The downward revision reflected rising tariffs and uncertainty on US trade policy.
With inflation easing and activity soft, the European Central Bank delivered its widely expected 25 basis point cut on 5 June, taking the deposit rate to 2.0%. ECB President Christine Lagarde said the central bank had “nearly concluded” the latest policy cycle, which has entailed eight rate cuts since July 2024. She said the current policy stance was in a “good place” and that rate setters were not on any “pre-set path” and would continue to be led by economic data.

In summary

While political headlines and trade disputes have stirred uncertainty, markets have shown resilience, with equities performing strongly and economic data in the UK improving beyond expectations. Interest rate cuts in both the UK and Europe should provide some support for growth. Although global challenges remain, especially concerning US fiscal policy and trade tensions, diversified portfolios remain well-positioned to weather these developments. As always, your investments are designed with these market shifts in mind, ensuring your long-term goals stay on track regardless of short-term news.