To be continued

Market recap

In the first quarter of 2025, the global macroeconomic landscape showed distinct regional characteristics, yet common threads tied together developments in the US, UK, and the Eurozone. Across these major economies, central banks pursued monetary easing, while grappling with cooling inflation and concerns about economic growth, all against the backdrop of rising geopolitical tensions.

The key theme across all three regions was a reduction in short-term interest rates, as central banks responded to moderating inflation and slowing growth. The European Central Bank (ECB) was the most aggressive, cutting its deposit rate by 25 basis points to 2.50% in March, continuing its easing cycle that began in mid-2024.

Meanwhile, the Bank of England (BoE) maintained its Bank Rate at 4.50%, with a division within the monetary committee hinting at potential future cuts.

Similarly, the US Federal Reserve held its rates steady at 4.25-4.50%, signaling caution despite ongoing inflation concerns. The pace of easing differed across regions, with the ECB showing a more dovish stance compared to the more cautious Fed and BoE.

Inflation, which had soared in 2022, has been a focal point in each region’s economic management, and by Q1 2025, inflation had notably eased in the G7 countries, falling to 2.6%. This drop, driven largely by softening goods prices and normalization of supply chains, contrasted with regional growth dynamics.

The Eurozone's economic data was weaker than anticipated, with GDP growth forecasts revised downwards, highlighting concerns over productivity and long-term growth potential.

The UK, although facing rising inflation (3.0% in January), showed some resilience with a modest GDP increase in January, while the US economy outperformed expectations in 2024 but showed signs of slowing, with GDP growth forecast to decelerate in 2025.

One of the significant challenges in Q1 2025 was the announcement of new US tariffs, which created volatility and raised concerns about global trade. These tariffs, particularly on automobiles, impacted both the EU and the UK, while contributing to inflationary pressures in the US. The EU retaliated with counter-tariffs, further intensifying trade tensions. As the quarter closed, the US, UK, and Eurozone were navigating similar issues: inflation control, slowing growth, and the complex dynamics of global trade. The US exhibited stronger growth but faced risks from tariffs, the Eurozone struggled with weak growth and aggressive easing, and the UK presented a more balanced picture, showing resilience despite higher inflation. The divergent approaches of their central banks and the geopolitical backdrop suggested that 2025 would be a year of complex macroeconomic interactions, with continued uncertainty around trade, inflation, and growth in each region.

Source: BlackRock’s opinion using Bloomberg data as of 31 March 2025.. The opinions expressed are as of 31 March 2025 and are subject to change at any time due to changes in market or economic conditions. For illustrative purposes only. There is no guarantee that any forecasts made will come to pass.

Despite ongoing volatility driven by external factors such as U.S. tariff policy and fiscal stimulus efforts in Europe, the Eurozone has experienced modest economic growth, easing inflationary pressures, and a cautious market outlook, with key indicators showing signs of stability, as highlighted in the accompanying charts on inflation, economic growth, and market sentiment.

Market conditions remained highly volatile, driven by ongoing uncertainty surrounding U.S. tariff policy and Europe’s fiscal stimulus efforts, particularly Germany’s increased spending on defense and infrastructure. This has contributed to continued market instability, which is reflected in Chart 2: Euro Area Inflation, where the core inflation rate in the Euro Area, excluding energy, food, alcohol, and tobacco, rose by 2.4% in March 2025. This was the lowest level since January 2022, with the inflation rate showing significant fluctuations over the years.

The economy of the Eurozone expanded by 1.2% year-on-year in the fourth quarter of 2024, surpassing initial estimates of 0.9% and accelerating from the 1.0% growth seen in the previous quarter. This marked the fastest expansion since early 2023, supported by lower borrowing costs and easing inflationary pressures.

The growth pattern is illustrated in Chart 3: Euro Area Growth - Gross Domestic Product (Quarter-on-Quarter), where the recent increase is shown as a continuation of the upward trend.

The HCOB Eurozone Composite Purchasing Managers' Index rose to 50.9 in March 2025, surpassing both the preliminary estimate of 50.4 and February’s final reading of 50.2. This marked the third consecutive month of expansion in the Eurozone's private sector and the strongest growth since August, although overall growth remains modest, as shown in Chart 4: Euro Area Purchasing Managers' Index (Quarter-on-Quarter).

Over the quarter, market yields decreased following two 25 basis point interest rate cuts by the European Central Bank in January and March. These cuts were accompanied by signals indicating a continued willingness to lower key interest rates further. The Euro Short-Term Rate curve shifted downward, with the 1-month, 6-month, and 12-month rates falling by 55 basis points, 24 basis points, and 10 basis points, respectively. The 2-year Euro Short-Term Rate remained largely unchanged, while the 3-year rate saw a modest increase of 4 basis points.

As of the end of March, markets priced a 69% probability of a rate cut in April, which rose to 90% following the announcement of new tariffs. Despite this, some members of the European Central Bank expressed opposition to further cuts earlier in March, with a few advocating for a pause. The eventual outcome may depend on how trade relations with the United States evolve in the coming weeks.

*Quarter over quarter. **PMI stands for Purchasing Managers’ Indexes. PMI is an economic indicator that is derived from monthly surveys of private sector companies. An index level above 50 indicates an improvement in manufacturing activity, while an index level below 50 indicates a decline.

Source: BlackRock’s opinion using Bloomberg data as of 31 March 2025. The opinions expressed are as of 31 March 2025 and are subject to change at any time due to changes in market or economic conditions. For illustrative purposes only. There is no guarantee that any forecasts made will come to pass. Where $ is used, this refers to USD.

The Bank of England maintains a cautious stance amid inflationary pressures, with the UK economy showing moderate growth and ongoing market volatility.

At the most recent meeting of the Bank of England, the overall tone was modestly hawkish. The Monetary Policy Committee voted 8–1 to keep the benchmark policy rate at 4.5%, with only Dhingra supporting a 25 basis point rate cut. More policymakers than expected adopted a cautious stance, including Mann, who shifted from previously supporting a 50 basis point rate hike to voting for no change. Bank of England Governor Andrew Bailey emphasized that a rate cut in May was not guaranteed, noting that the committee remains focused on both global and domestic developments. Inflation forecasts suggest a potential rise to nearly double the 2% target later in the year. The Bank of England's forward guidance remains unchanged, with a "gradual and careful" path to easing still seen as appropriate. This is further reflected in Chart 5: Inflation, which shows the annual inflation rate in the United Kingdom falling to 2.8% in February 2025 from 3% in January, in line with the Bank of England's forecast.

The British economy expanded by 1.1% in 2024, revised up from the initial estimate of 0.9% and surpassing the 0.4% growth recorded in 2023. This growth is illustrated in Chart 7: United Kingdom Growth - Gross Domestic Product (Quarter-on-Quarter), where the upward revision in 2024 highlights the economy’s resilience despite previous headwinds.

UK money market rates declined over the quarter, with the curve shifting downward by approximately 25 basis points across maturities. By the end of March, markets were pricing in a 70% probability of a 25 basis point rate cut in May, with a total of 58 basis points of easing expected over the next 12 months. The terminal rate is projected to reach 3.90% within one year. This trend is further reflected in Chart 6: Purchasing Managers' Index, where the S&P Global UK Composite Purchasing Managers' Index registered 51.5 in March 2025, surpassing February’s reading of 50.5.

Ongoing uncertainty surrounding U.S. tariffs continues to contribute to elevated market volatility. With numerous conflicting dynamics affecting the macroeconomic outlook, predicting the trajectory of growth and inflation remains difficult. In this context, a cautious approach to managing duration risk within money market portfolios is being maintained.

Source: BlackRock’s opinion using Bloomberg data as of 31 March 2025.. The opinions expressed are as of 31 March 2025 and are subject to change at any time due to changes in market or economic conditions. For illustrative purposes only. There is no guarantee that any forecasts made will come to pass. Where $ is used, this refers to USD.

Ongoing efforts by the Federal Open Market Committee (FOMC) to normalize monetary policy amid persistent inflation dynamics and a relatively stable labor market characterized the final quarter of 2024.

In the first quarter of 2025, the Federal Open Market Committee (FOMC) consistently voted to keep the federal funds rate unchanged in the range of 4.25-4.50%. This decision marked a pause in the recent rate-cutting regime that had seen a reduction of the funds rate by a full percentage point over the final months of 2024.

Throughout the quarter, the FOMC maintained a cautious stance due to persistently high inflation and solid labor market conditions, evidenced by a low unemployment rate. The committee's decisions were influenced by the need to assess incoming data and the potential impact of the new administration's policies on tariffs, immigration reform, and taxes.

The minutes from the January meeting reinforced the committee's readiness to keep the current rate steady amid high inflation and economic policy uncertainty. Concerns about slowing growth and softening labor components were highlighted, with implied probabilities for future rate cuts increasing. The trend in total assets under management (AUM) across money market funds showed stronger inflows, while net treasury bill supply declined significantly. This tightening in supply/demand dynamics influenced conservative positioning in the market.

For the second consecutive meeting in March, the FOMC kept the funds rate unchanged. The committee continued to exercise caution due to the economic landscape, which was characterized by elevated inflation and concerns about slowing growth. The pace of balance sheet reduction was slowed, with a cap of $5 billion in Treasuries allowed to mature versus the previous cap of $25 billion per month. Chair Powell acknowledged the potential transitory nature of tariff-driven inflation increases. The updated quarterly Summary of Economic Projections reflected lower growth forecasts and higher inflation estimates. The committee emphasized the need to control inflation before making further adjustments to monetary policy.

Economic data released during the first quarter of 2025 continued to indicate a resilient backdrop, prompting the Federal Reserve to pause its interest rate cutting cycle for the first time since it began in 2024. However, growing market attention on the incoming U.S. President’s policy direction particularly the prospect of increased global trade tariffs led to a notable shift in expectations for future monetary policy. As concerns around potential risks to both growth and inflation rose, money market yields exhibited heightened volatility in line with changes in interest rate forecasts.

By quarter-end, markets were pricing in three to four additional 25 basis point cuts later in the year.

This contributed to a slight inversion of the money market curve from 1-month to 1-year maturities, primarily driven by a decline in longer-dated tenors.