2025 Weekly Update

Market update

The S&P 500 closed the week at 6,000.36, +1.50% higher. The Dow Jones closed at 42,762.87, +1.17%, with the Nasdaq higher by +2.18%. The volatility index VIX closed the week at 16.77, down from 18.57. The Euro Stoxx 600 rose +0.91%.

The 10-year UST closed at 4.50%, up from 4.40% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 16bps. US Corporate Bond spreads: Investment Grade spreads narrowed -5bps at 169bps and High Yield spreads narrowed -5bps at 357bps. German 10-year Bunds yield closed at 2.58% up from 2.50% a week before. In Europe, Corporate Investment Grade spreads narrowed -2bps at 107bps and High Yield narrowed -30bps at 330bps.

The US Dollar Index (DXY) depreciated -0.14% last week and closed at 99.19. The Euro closed at 1.1397 (+0.44%); the Yen depreciated -0.58%, closing at 144.85 and the Swiss Franc appreciated +0.01%, closing at 0.8223. Gold closed at $3,310.42, appreciating +0.64%. Oil was higher, Brent closed at $66.47 (+4.02%) and WTI at $64.58 (+6.23%).

Macroeconomy

Jobs report

The US economy added 139k jobs in May according to the Establishment survey, higher than the consensus forecast of 126k and much better than what ADP suggested on Wednesday which hit a two-year low. Employment continued to trend up in health care, leisure and hospitality, and social assistance. Federal government continued to lose jobs (-22K in May). Establishment survey revisions were negative, with March cut 65k and April reduced 30k (both month’s employment was reduced by 95k on a combined basis). Manufacturing/goods-producing trends were soft in May (manufacturing job losses were 8K). The Household survey was very negative, showing a 696k decline in the number of employed people. The unemployment rate was unchanged m-o-m and in line with estimates at 4.2%. The participation rate dipped 20bps m-o-m, falling to 62.4% (consensus was flat). The workweek length was flat m-o-m and in line with the forecast at 34.3 hours. Hourly wage growth was elevated, coming in at +3.9% y-o-y (vs. consensus of +3.7% and vs. an upwardly revised +3.9% in April). Average weekly earnings growth was a bit softer than the hourly rate at +3.8%. In summary, we have seen very stable private sector hiring trends over the past three (133k), six (146k) and twelve (122k) months. However, the narrow breadth in job growth as health care/social assistance (+78k) and leisure/hospitality (+48k) continued to drive the majority of private sector job gains in May and have accounted for 75% of private job growth over the past twelve months.

Tariffs

Reuters reported that the Trump administration wanted countries to provide their best offer on the trade negotiations. As a reminder, there’s just over a month until the 90-day extension for the reciprocal tariffs runs out on July 9, so the US are trying to negotiate lots of deals before that, and Press Secretary Karoline Leavitt said that “I can confirm the merits in the content of the letter”. On US-China trade, President Trump and President Xi joined a call. Trump posted that it was “a very good phone call” which “resulted in a very positive conclusion for both Countries.” In the post, it said that their respective teams would soon meet, and that “There should no longer be any questions respecting the complexity of Rare Earth products”. President Trump also signed the executive order that imposed the higher 50% tariffs on steel and aluminum announced the previous week with immediate effect.

One BBB Act

The Congressional Budget Office (CBO) released its updated estimate of the effects of the One Big Beautiful Bill Act (OBBBA) on the deficit. The numbers were very similar to its early estimate published on 20 May. The total increase in the primary deficit would reach $2.42tn over the next ten years (compared with $2.31tn in the previous version), and therefore the total deficit including interest charges ($750bn) would increase by $3.17tn. However, the CBO did not include the macroeconomic effects of the bill on growth and revenues. The CBO also published an analysis of the tariffs effects on the budget and the economy, arguably on the optimistic side of estimates. Tariffs would increase revenues by $2.5tn over ten years (accounting for adjustments in imports) but also reduce federal borrowing and hence interest payments by $0.5tn; lastly, tariffs would weigh on growth, reducing the size of the economy relative to the baseline. Accounting for all these effects, the CBO estimates that tariffs will reduce total federal deficits by $2.8tn over ten years. On trade data, details for April confirmed the large swings in imports related to tariffs frontloading, including a large drop in imports from China but a rise in imports from Asian countries, as well as a massive decline in imports from the EU (driven by the pharmaceutical sector) following a surge in the previous month. The US trade deficit narrowed sharply to $61.6bn in April, reflecting the impact of the new tariffs. That was the smallest monthly deficit since September 2023, and a huge decline from the prior month's $138.3bn trade deficit. Given that lower imports mechanically add to GDP, this is expected to lead to a strong bounce back in GDP for Q2 after the Q1 contraction. Indeed, the Atlanta Fed’s latest GDPNow estimate is pointing to annualized growth of +3.8% in Q2.

US data

Economic data have been consistent with an ongoing slowdown in economic momentum, albeit a gradual one. The ISM indices declined by more than expected in May, both in the manufacturing (48.5) and non-manufacturing sectors (49.9) as business expectations deteriorated further and prices paid remain very elevated. The ADP report missed expectations, rising by 37k in May vs consensus of 110k.

ECB meeting

The European Central Bank lowered its policy rates by 25bps, bringing the deposit rate to 2.0% (as widely expected), marking the eighth reduction since last summer. Staff projections were adjusted downward for inflation. Headline inflation forecasts for 2025 and 2026 were reduced by 0.3 percentage points to 2.0% and 1.6% respectively, reflecting lower energy price assumptions and a stronger euro. Lagarde struck a relatively hawkish tone in the press conference, mentioning that “we are well positioned to navigate the uncertain conditions that will be coming up, adding that "we are approaching the end of a monetary policy cycle”. After Lagarde's comments, markets expect a pause in July, with much hinging on the progress of trade negotiations.

Canada

The Bank of Canada left their policy rate on hold at 2.75%, in line with expectations. Afterwards, Governor Macklem said “there was a clear consensus to hold policy unchanged as we gain more information”. And in future, he said “members thought there could be a need for a reduction in the policy rate if the economy weakens in the face of continued US tariffs and uncertainty, and cost pressures on inflation are contained”.

Swiss data

Swiss headline inflation declined to -0.1% y-o-y (+0.1% m-o-m) in May, down from 0.0% in April, in line with expectations. This marks the first negative print since early 2021. Domestic inflation continued to ease. May's figures confirm the very weak inflation pressures in Switzerland. The Q2 average inflation (April/May) is now much lower than the SNB's March projections, justifying a rate cut on June 19. The question is by how much. The SNB may still cut by 25bp 'only' hoping for the Fed and the ECB to sound more hawkish. Swiss GDP, adjusted for sporting events, grew by 0.8% q-o-q in Q1, following a 0.6% increase in Q4. This marks the fastest growth in two years. There is clear evidence of frontloading related to US trade policy. Notably, growth in the chemical and pharmaceuticals industry accelerated in Q1 (+7.5%), driven by exports of pharmaceutical products. Looking ahead, surveys indicate a sharp slowdown in Q2.

China data

Consumer prices have decreased for the fourth consecutive month in May, registering a decline of -0.1% y-o-y (compared to an expected -0.2% and -0.1% in April). This trend might suggest that Beijing's stimulus measures have not yet been sufficient to enhance domestic consumption amid ongoing trade tensions. Furthermore, deflationary pressures are intensifying on some measures as the PPI fell by -3.3% y-o-y in May, surpassing the expected -3.2% and marking the most significant drop in nearly two years, exceeding April’s decline of -2.7%. Interestingly, Chinese exports to the US fell -34.4% in May whilst rising 11% to the rest-of-the-world, showing that exports didn't recover that well to the US after the trade truce and that China are finding other avenues to export goods. The official manufacturing PMI picked up in May, with a strong rebound in new export orders. But price pressures worsened amid lower oil prices. Services PMI inched up, probably in part due to less weak housing sales based on daily data. Housing investment weakness probably continued dragging construction PMI lower even with stronger infrastructure related construction. There was divergence between official manufacturing PMI and Caixin, with the latter down. This is not unusual, historically more than 30% probability. We put more weight on official PMI as empirically it has higher correlation with hard data, even though correlation between PMIs and hard data in China overall is weak.

Highlights

On rates

It was a volatile week for sovereign yields as bond investors reacted to the latest batch of economic data. Rates fell midweek after the weak ADP and the ISM services numbers, with the 30yr US Treasury yield recording its biggest daily decline since February, falling -10.3bps. Yields moved in the other direction on Friday after the strong jobs report which led investors to price out the likelihood of Fed rate cuts this year. Futures are pricing just 44bps of rate cuts by December, down -10.6bps on the week, and down from 55bps before the jobs report. That’s the fewest cuts priced in since February, and it triggered a significant flattening in the US Treasury curve. Over the week, the 2yr Treasury yield rose +13.9bps (+11.6bps on Friday) and closed at 4.04%. The 10-year Treasury yield ended the week at 4.51%, up +10.5bps, while the 30yr yield closed at 4.97%, +3.7bps higher. Similar movements were echoed in Europe, as the 10-year Bund yield ended the week up +7.4bps (-0.6bps) at 2.57%. That also came as ECB President Lagarde indicated on Thursday that they were approaching the end of their easing cycle.

What to watch

• Tuesday: Japan May M2, M3, machine tool orders; UK April average weekly earnings unemployment rate, May jobless claims change US May NFIB small business optimism
• Wednesday: Japan May PPI; Canada April building permits; US May CPI, federal budget balance
• Thursday: UK May RICS house price balance, April monthly GDP; Germany April current account balance; US May PPI, Q1 household change in net worth, initial jobless claims
• Friday: Japan April capacity utilization, Tertiary industry index; Germany May wholesale price index; Eurozone April trade balance, industrial production; Canada April manufacturing sales, Q1 capacity utilization rate; US June University of Michigan survey