Week ending 23rd May 2025.

Global equity markets pulled back this week amid a spike in U.S. Treasury yields, renewed trade tensions, and concerns over fiscal policy. The S&P 500 and Dow Jones Industrial Average fell back into negative territory for the year, while the Nasdaq, though more resilient, still declined by 2.5%. In Europe, markets followed suit, though the UK’s FTSE 100 ended modestly higher, up 0.4%.

Adding to market activity, the U.S. House of Representatives passed President Trump’s new tax cut bill, which extends existing cuts and introduces additional measures aimed at supporting economic growth. The bill now moves to the Senate for further discussion and potential amendments. While some concerns were raised about the bill’s long-term fiscal impact—particularly its effect on the U.S. deficit—longer-dated Treasury yields edged higher, a move that also followed a recent Moody’s downgrade. Although the downgrade drew attention earlier in the week, it does not signal an immediate risk to U.S. creditworthiness or alter the key fundamentals underpinning the economy and markets. Treasuries remain a core global safe haven, and yields eased back later in the week.

While some are wary of the proposed tax cuts and the potential impact on the deficit, others view it as a pro-growth measure that could support consumer spending and corporate investment over time.

Markets were further unsettled on Friday after President Trump announced plans for a 50% tariff on imports from the European Union, citing stalled negotiations and accusing the bloc of being “very difficult to deal with.” However, as expected, Trump later walked back the timeline. On Sunday, he said the tariffs would be delayed until 9 July following a call with European Commission President Ursula von der Leyen. The delay eased immediate concerns and gave markets some breathing room as diplomatic talks continue.

Against this backdrop, economic data offered a more encouraging tone. Business activity in the US rebounded in May, with both manufacturing and services PMIs beating expectations. Encouragingly, business sentiment improved to its highest level in four months, supported by stronger demand and a temporary pause in tariff escalations.

European data was mixed: the eurozone composite PMI fell into contraction, but Germany’s first-quarter GDP was revised up to 0.4%. In the UK, inflation ticked up to 3.5% in April, but retail sales and consumer confidence both exceeded expectations, suggesting households remain relatively resilient.

In China, industrial production data was stronger than expected, helping offset weaker retail sales. While uncertainty remains, expectations for additional fiscal support from Beijing are growing.

Despite recent volatility, the economic outlook remains positive, with improving business activity, stabilising sentiment, and support from stimulus measures.

UK and U.S. markets will be closed on Monday, 26^th May, for the Spring Bank Holiday and Memorial Day, respectively. European and markets across Asia will remain open. Data wise next week, we can expect US durable goods, consumer confidence and PCE. Market participants will also be looking for ques for future policy decisions with the release of the Federal Reserve’s latest policy meeting minutes. Eurozone economic sentiment, Japanese retail sales and industrial production.

Kate Mimnagh, Portfolio Economist