Welcome to this week’s Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Today, we’re looking at credit spreads, government spending, and British pay growth.

But first, our number of the week…

1%

That’s how much consumer spending rose in the UK in February, according to Barclays data. That’s down nearly a point from a month earlier and well below current 3% inflation.  

Sidekick Takeaway: Like many developed economies, the UK is reliant on consumer spending to fuel growth. Chancellor Reeves’ widely expected spending cuts may come at exactly the wrong time for the UK amid mounting evidence of a consumer slowdown. 

Now to our main stories…

Only have a minute to read? Here’s the TL;DR:

• Amid the pullback in US equities, yields on Treasuries have fallen as investors anticipate accelerated rate cuts. Despite this, yields on riskier corporate bonds have actually risen as default concerns drive up credit spreads. 
• The deepening defence rift between the US and Europe is partially rooted in profoundly different beliefs on the role of public spending. While the US is on a mission to slash government expenses, Europe’s ‘military Keynesianism’ could help fuel growth. 
• Wage growth for new British hires fell to its lowest level in four years, with data showing employers slowing the rate of pay increases more broadly. This trend could help give the BoE more flexibility to cut rates amid stubborn inflation. 

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

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Healthy Spread: Risky Yields Rise Amid Market Turmoil

After a nearly uninterrupted two-year bull run, the mood in US markets has shifted rapidly.

Trump’s on-again-off-again tariffs have spooked investors. The S&P 500 is on the verge of the 10% decline that would mark a correction, a milestone the Nasdaq hit this week.

There’s evidence this anxiety is spreading to the real economy. JPMorgan recently raised the firm’s US recession odds to 40%, citing rising business uncertainty.

While tariff disruption is most noticeable in the stock market, this episode has implications for bond investors too.

Yields have dropped a lot – or risen a little. 

In the wake of market volatility, the yield on US Treasuries dropped noticeably:

• Both the 1-year and 10-year Treasury yield have fallen by about 30 basis points compared to a month prior – US mortgage rates are now at their lowest level in months.
• Investors are betting that increased economic disruption has raised the odds of more Fed rate cuts.
• However, high-yield corporate bond rates have actually risen, climbing about 20 basis points over the past month.

What’s driving corporate bond yields up even as Treasury yields fall?

One factor is driving this discrepancy: credit spreads.

The ‘spread’ refers to the extra compensation that investors demand for holding risky bonds. It tends to rise when investors think there’s trouble ahead for corporate bankruptcies. 

Not surprisingly, high-yield bond spreads have risen by about 50 basis points since February – explaining much of the difference.

Sidekick Takeaway: When spreads are low and stable, it can make sense to treat ‘fixed income’ as one homogeneous category. But as the economic clouds circle, different bonds are moving in different directions. Looking forward, bond investors may have to be more thoughtful about the yield-risk tradeoff. 

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The Transatlantic Rift: Two Visions of Public Spending

The rift between the US and Europe continues to widen. 

Amid concerns that the US may leave NATO, the EU unveiled a plan for €150 billion in joint defence bonds. 

Meanwhile, the UK and France are playing a leading role in securing peace in Ukraine as the US steps back from the conflict.

But this split isn’t entirely about defence posture – it’s also about profoundly different views on the role that government spending should play in the economy. 

Government spending: Help or hindrance?

America’s desire to pull back on defence spending is rooted in a broader belief that government expenses are inherently wasteful.

Last week, reports indicated that the Trump administration is even considering removing government spending from GDP figures. 

On the other hand, European governments are showing no compunction about adding to public expenses. Even Germany looks set to modify its hallowed ‘debt brake’ to fuel spending.

So, which view is right?

While few would argue that governments spend money as efficiently as the private sector, it is wrong to think that public spending plays no role in fostering economic vitality.

In fact, academics often cite America’s massive military spending during World War II as a key factor in ending the Great Depression. Today, Europe’s defence ramp-up constitutes a similar form of ‘military Keynesianism.’ 

Sidekick Takeaway: While the US-Europe rift might appear to be just about defence, it has broader implications for the future of each region’s economy. Europe’s coming wave of public spending could help fuel the continent’s sluggish growth. 

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A Mixed Blessing: British Pay Growth Slows

A closely watched private survey contained bad news for new British workers – but potentially good news for the British economy.

In February, wage growth for new hires in the UK slowed to its lowest level in four years. 

That follows a recent BoE survey showing that firms are widely expecting to slow the rate of pay increases in 2025.

These data points are evidence that businesses are cutting back in response to the government’s employment tax hike, set to come into effect in April. 

They also undermine Labour’s pledge not to raise taxes on ‘working people’ – as workers are now bearing a portion of the burden.

So, why might this be good news?

For the economy as a whole, slowing wage growth could be a good thing.

Businesses may face less pressure to raise their prices to cover higher labour costs. That should help ease inflation.

In turn, this should offer the BoE more room to cut rates this year – providing increased economic support and helping to boost growth.

Although the BoE is likely to keep rates steady in March, markets are currently expecting a small cut in May, with further easing throughout the year. 

Sidekick Takeaway: While no one likes to see smaller raises, the hope is that this data offers the BoE more flexibility at the next few meetings. The bank faces a tough challenge in threading the needle between stubborn inflation and stagnant growth.

Notices

Sidekick Money Ltd is a company registered in England and Wales (No. 13882980). Sidekick Money Ltd is authorised and regulated by the Financial Conduct Authority (FRN 984829). Our address is 21-33 Great Eastern St, London, EC2A 3EJ.

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