2025 Weekly Update

Market update

The S&P 500 closed the week at 5,958.38, +5.27% higher. The Dow Jones closed at 42,654.74, +3.41%, with the Nasdaq higher by +7.15%. The volatility index VIX closed the week at 17.24, down from 21.9. The Euro Stoxx 600 rose +2.10%.

The 10-year UST closed at 4.48%, up from 4.38% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 13bps. US Corporate Bond spreads: Investment Grade spreads narrowed -6 bps at 176bps and High Yield spreads narrowed -26bps at 361bps. German 10-year Bunds yield closed at 2.59% up from 2.56% a week before. In Europe, Corporate Investment Grade spreads narrowed -7bps at 111bps and High Yield narrowed -25 bps at 366bps.

The US Dollar Index (DXY) appreciated +0.75% last week and closed at 101.09. The Euro closed at 1.1163 (-0.77%); the Yen depreciated -0.23%, closing at 145.7 and the Swiss Franc depreciated -0.76%, closing at 0.8376. Gold closed at $3,203.65, depreciating -3.65%. Oil was higher, Brent closed at $65.41 (+2.35%) and WTI at $62.49 (+2.41%).

Macroeconomy

US downgrade

Moody's cut the US credit rating on Friday night from Aaa to Aa1 (stable outlook). This is a major symbolic move as Moody's were the last of the major rating agencies to have the US at the top rating. Moody's have had them on watch since November 2023 and rating changes tend to follow in the next 12-18 months so the announcement was not totally unexpected. S&P was the first to downgrade the US from AAA back in August 2011 which brought a brief market panic at the time. The S&P 500 fell -6.7% on August 8 (the Monday after the cut) while Treasuries actually rallied 20bps on a flight to quality bid. A slightly different reaction this time given they are "only" playing catch-up on one hand, but with debt sustainability now more of a concern on the other.

US inflation

US April CPI report came out weaker than predicted, with monthly headline and core CPI each up +0.2% (vs. +0.3% expected for both). From a market point of view, the main relief was also that tariffs weren’t showing up in a major way in consumer prices, even though April included the 10% universal baseline tariffs, and much higher tariffs on China. Admittedly, there were some categories likely showing tariff-related jumps, like an +8.8% monthly rise for audio equipment, but the broad impact was muted. And in turn, the y-o-y CPI rate fell to just +2.3%, which is the weakest since February 2021. From the producers side, US PPI data for April showed inflation pressures were much softer than expected, with headline PPI down -0.5% on the month (vs. +0.2% expected). That marked the biggest monthly decline in producer prices since April 2020 and the Covid lockdowns, and it pushed the y-o-y reading down to +2.4% (vs. +2.5% expected). Core PPI was also softer than expected, with the measure excluding food energy and trade down -0.1% on the month (vs. +0.3% expected), which was the first negative print since April 2020. It also helped broader inflation expectations to move lower, and the US 10yr inflation swap fell -4.7bps on the day to 2.50%, marking its biggest decline in over a month. On the corporate side, Walmart warned that prices would go up as a result of tariffs.

US data

US data continued to point away from a recession. For instance, the weekly initial jobless claims remained at 229k over the week ending May 10 (vs. 228k expected), so still in their recent range and not signaling a sharper deterioration. In the meantime, the retail sales data showed modest growth of +0.1% in April (vs. unchanged expected), which was a slowdown from March, but still not the contractionary territory that might be expected in an outright recession. And with the latest data in hand, the Atlanta Fed’s GDPNow estimate for Q2 moved up to an annualized +2.5% pace.

Fedspeak

Fed Chair Powell indicated that the Fed were reconsidering the language on average inflation targeting in their latest review. For reference, in 2020 they changed their approach to permit a period of inflation above the 2% target, if it followed a period of inflation running beneath target, so that was a significant shift. However, the potential to move back off that again was seen in a hawkish light, as it implied less tolerance for higher inflation in the future, and Treasury yields briefly spiked as the headlines came through. Fed Governor Barr reiterated the standard message from US monetary officials: the economy is in a decent spot right now, but the outlook is filled with uncertainty, which means no policy changes are likely for the foreseeable future. Regional presidents struck a measured tone, with San Francisco Fed President Daly saying that “the word of the day is patience” while Chicago Fed President Goolsbee said that a “solid hard data economy is still there” beneath the recent noise.

Japan GDP

Japan’s Q1 GDP reading showed a larger-than-expected contraction, with the economy shrinking at an annualized -0.7% pace in Q1 (vs. -0.3% expected).

Highlights

On rates

US sovereign yields rose across the curve influenced by weak consumer sentiment and rising inflation expectations which reached a 40-year high back to 1980s. The 10yr Treasury yield rose for a third consecutive week, up +10.0bps to 4.48%, while the 30yr yield rose +11.0bps to 4.94%, its highest weekly close since January. The Treasury sell off gained some momentum late on Friday after the Moody’s US downgrade news. Fed expectations moved in a hawkish direction, with the amount of cuts priced in for the year falling -16.5bps to 49bps. This marks the first time since February that investors forecast less than two rate cuts in 2025 and the move came despite softer than expected US inflation data. Over in Europe, sovereign bonds saw more muted moves. 10yr bund yields ended the week at 2.59%, up +2.8bps, while but OAT and BTP yields were down -0.2bps and -1.3bps respectively as sovereign spreads continued to grind lower.

Earnings season

The 2025 Q1 earnings season is coming to an end. In the US, 89% of S&P 500 companies have published their results. So far, beats for top and bottom-line are slightly below the recent historical average. From the companies that reported, 72% beat earnings expectations while 57% beat sales estimates (vs. the last four quarters average of 74% and 60% respectively). However, the level of earnings surprise is strong with companies beating EPS estimates by an average of 7.6% (vs. 4.1% average in the last four quarters). Looking at the Magnificent 7, earnings surprise is well ahead of the S&P 493 (16.4% vs. 5.0%) though revenue surprise has been weaker (0.3% vs. 0.9%). The Magnificent 7 continue to exhibit stronger earnings (28.0% vs. 8.4%) and revenue growth (8.9% vs. 3.8%) compared to the other 493 companies. Looking ahead, next quarter’s earnings estimates continue to be lowered. 2025 Q2 EPS has been revised down -3.1% while 2026 EPS has been revised lower by -1.9%. Over in Europe, close to 90% of Stoxx600 companies have published their Q1 earnings. So far, 48% and 62% of companies have beaten sales and EPS estimates, respectively. Overall, EPS is surprising positively by 4% and EPS growth is coming in at -2% y-o-y. Energy and Consumer Discretionary continue to be a drag on the region’s overall earnings delivery. EPS growth excluding these two sectors is coming in at +5% y-o-y.

What to watch

• Monday: China April data (retail sales; IP; FAI); Euro area final HICP; US Conference Board leading economic index
• Tuesday: RBA Policy Meeting; Canada CPI
• Wednesday: Bank of Indonesia Policy Meeting; Japan trade balance; Thailand trade balance; UK CPI
• Thursday: Japan machinery orders; Euro area and UK flash PMIs; German IFO; US PMIs, Initial Jobless Claims
• Friday: Japan CPI; Euro area negotiated wages; UK retail sales; US new home sales