2025 Weekly Update

Market update

The S&P 500 closed the week at 5,802.82, -2.61% lower. The Dow Jones closed at 41,603.07, -2.47%, with the Nasdaq lower by -2.47%. The volatility index VIX closed the week at 22.29, up from 17.24. The Euro Stoxx 600 fell -0.75%.

The 10-year UST closed at 4.51%, up from 4.48% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 17bps. US Corporate Bond spreads: Investment Grade spreads widened +2bps at 178bps and High Yield spreads widened +8bps at 369bps. German 10-year Bunds yield closed at +2.57% down from +2.59% a week before. In Europe, Corporate Investment Grade spreads remained at  at 111bps and High Yield narrowed -5 bps at 361bps.

The US Dollar Index (DXY) depreciated -1.96% last week and closed at 99.11. The Euro closed at 1.1362 (+1.78%); the Yen appreciated +2.16%, closing at 142.56 and the Swiss Franc appreciated +1.97%, closing at 0.8211. Gold closed at $3,357.51, appreciating +4.80%. Oil was lower, Brent closed at $64.78 (-0.96%) and WTI at $61.53 (-1.54%).

Macroeconomy

Tax bill

The US House of Representatives narrowly passed the tax bill, with a tight 215-214 margin in favor. The bill would extend the Trump tax cuts from his first term, which are currently due to expire at the end of this year, and it also includes a $4tn increase in the debt ceiling. It also has to pass the Senate, which is expected to make changes to the bill. For instance, fiscal hawks in the Senate are unhappy about some of the measures, with Senator Rand Paul having said “I’m not voting to raise the debt ceiling $4 trillion to $5 trillion”, whilst Senator Ron Johnson has described the deficits from the House bill as “completely unacceptable”. Republicans have a slightly more comfortable margin in the Senate of 53-47 and both chambers of Congress need to pass the same version of the bill before it can become law. So, any changes made by the Senate will have to be re-voted on by the House, where it already passed by just one vote. Treasury Secretary Bessent has previously set a goal of July 4 for the bill to be signed, and Trump said in a post that “it’s time for our friends in the United States Senate to get to work, and send this Bill to my desk AS SOON AS POSSIBLE! There is no time to waste.” Another effective deadline is the late summer anyway, as the CBO have estimated that the debt ceiling will become an issue around August-September again, so Congress would need to raise the limit by then to avoid default.

US & Canada data

US economic data continued to point away from a recession. The flash composite PMI for May was up to 52.1, up from 50.6 in April, and above the 50-mark that separates expansion from contraction. Weekly initial jobless claims also remained in their recent range, coming in at 227k over the week ending May 17 (vs. 230k expected). In Canada, the CPI print was stronger than expected. Although headline inflation eased to +1.7% in April (vs. +1.6% expected), both core inflation measures unexpectedly rose, with CPI-median at +3.2% (vs. +2.9% expected), and CPI-trim at +3.1% (vs. +2.8% expected). That led investors to dial back expectations for a rate cut at the Bank of Canada’s next meeting, which is now only seen as a 28% probability, down from 68% previously.

Fedspeak

Fed officials signaled they are not in a hurry to cut rates. For instance, Vice Chair Jefferson said: “I believe that it is appropriate that we wait and see how the policies evolve over time and their impact”. Similarly, Atlanta Fed President Bostic said: “I think we’ll have to wait three to six months to start to see where this settles out” and reiterated his expectation of only one more rate cut this year. Meanwhile, New York Fed President Williams said: “It’s not going to be that in June we’re going to understand what’s happening here, or in July”. And Minneapolis Fed President Kashkari noted: “It’s really just wait and see until we get more information”. At the end of the week, Fed Governor Waller suggested that if the tariffs were closer to 10% and that was done by July, then the Fed would be well placed “to kind of move with rate cuts through the second half of the year”. In other Fed-related news, the US Supreme Court said that the Federal Reserve was an exception when it comes to the President’s ability to remove officials, referring to the Fed as a "uniquely structured, quasi-private entity" that was different to other independent agencies. So that offered a bit more certainty on the position of senior Fed officials, and whether Chair Powell might be removed before his term as Fed Chair ends in May 2026.

Europe data

Economic data was disappointing with the flash PMIs falling into contractionary territory. The Euro Area composite PMI was down to 49.5 in May (vs. 50.6 expected), which is the first sub-50 reading since December. That was echoed in the country prints as well, with the composite PMIs in Germany (48.6), France (48.0) and the UK (49.4) also coming in below the 50 mark. On the contrary, Germany Ifo’s business climate indicator rose to an 11-month high of 87.5 in May (vs. 87.3 expected). In terms of prices, disinflation remains on track. Euro area HICP inflation details confirmed that the jump in services in April was mostly linked to Easter. Euro area March inflation grew +2.6% m-o-m (+1.2% excluding Ireland). The April final country HICP came in as follows: Germany and Spain unchanged (+2.2% y-o-y), France up (+0.9%) and Italy down (+2.0%). In the UK, headline CPI rose more than expected to +3.5% in April (vs. +3.3% expected), whilst core inflation also rose to +3.8% (vs. +3.6% expected). In absolute terms, it was also the fastest headline inflation rate since January 2024, so that led investors to dial back their expectations for rate cuts from the Bank of England. For example, the amount of cuts priced by December came down to 38bps.

Japan data

In Japan, the latest CPI print showed headline CPI remaining at +3.6% in April (vs. +3.5% expected). The core measure of inflation (excluding fresh food) was up to +3.5% (vs. +3.4% expected), which was its fastest level since January 2023. Japan's manufacturing sector continued its decline in May, marking the 11th consecutive month below 50, coming in at 49.0 in May, showing a slight improvement from the previous month's level of 48.7. Services remained in expansion at 50.8 in May, although it slowed from April's 52.4. The composite declined to 49.8 in May from 51.2 in April.

China data

The Bank of China (PBOC) cut the 1-year loan prime rate (LPR), the reference rate for pricing all new loans and outstanding floating rate loans, to 3.0% from 3.1% and the 5-year LPR to 3.5% from 3.6%. April activity data was mixed, with industrial production (IP) surprised to upside while retail sales/investment below expectations. IP was down only slightly on the back of lower but less than feared exports. Based on daily data, China exports for May so far improved from April. Slower but still robust government driven investment like manufacturing and infrastructure also helped. Retail sales was modestly lower in April, which, along with moderation in service, suggests slower overall consumption. Housing prices and activity moderated further in April. Daily data suggests housing sales and prices remained weak so far in May.

Highlights

On rates

It was a very volatile week for sovereign bonds. In the US, fears about the fiscal situation and a soft Treasury auction pushed yields higher, especially at the long end of the curve. At one point during the week, the 30yr Treasury yield closed at 5.09%, above 5% for the first time since October 2023, and only 2bps away from its highest level since 2007. The 2yr yield ended the week at 3.99%, down -1bp, while the 10yr yield closed at 4.51%, up +3bps. Fed expectations shifted slightly in a hawkish direction, with the market now pricing in 47bps worth of incremental cuts for the year, down from 49bps at the start of the week. Long-term borrowing costs in other major economies followed the same pattern as US yields. In Japan, the 30yr yield reached its highest level since 1999 when that maturity was first issued. Similarly, the 30yr Gilt approached levels not seen since 1998. Long dated bonds in Germany and Australia also faced selling pressure.

Earnings season

More than 95% of S&P 500 companies have reported Q1 earnings and EPS numbers have been strong. Both the percentage of companies beating EPS expectations and the magnitude of earnings surprises are above their 10-year averages. 78% of companies beat EPS forecasts and earnings are surprising positively by +8.3%. Top line numbers are not as strong with 63% of companies beating sales estimates, slightly below the 10-year average of 64%. In aggregate, companies posting revenues that are 0.7% above consensus. So far, earnings growth is coming in at +12.9% y-o-y. Looking ahead, 47 S&P 500 companies have issued negative earnings guidance for Q2 while 40 S&P 500 companies have issued positive guidance. The main releases this week include Nvidia, Salesforce, and Costco. In Europe, 91% of companies have published their results. 41% of them surprised positively on top line and 55% beat EPS expectations.

What to watch

• Monday: Japan Leading Index; Korea Consumer Confidence
• Tuesday: China Industrial Profits; Euro zone Consumer Confidence; France CPI; US Durable Goods Orders, Consumer Confidence
• Wednesday: Australia CPI; France Q1 GDP, Germany Unemployment; US Richmond Fed Manufacturing, FOMC Meeting Minutes
• Thursday: Japan Foreign Bond Buying; Italy Consumer & Manufacturing Confidence; US Initial Jobless Claims, Q1 GDP revision 
• Friday: Tokyo CPI, Japan Industrial Production & Retail Sales; Germany, Italy CPI; US Personal Spending, PCE Price Index, UMICH Sentiment