Weekly Market Recap

Higher utilities and housing prices boosted the UK’s annual inflation rate to 3.5% in April—the highest level since January 2024—from 2.6% in March. Analysts polled by FactSet had expected an increase to 3.3%. Separately, retail sales rose 1.2% in April from the prior month and 5.0% YoY, coming in well above expectations. Consumer confidence also improved in May, albeit from low levels, according to surveys from GfK and the British Retail Consortium.

However, private sector activity contracted for a second consecutive month in May, according to purchasing managers’ surveys. A small expansion in services was offset by a sharp deterioration in the manufacturing sector.

After a relatively quiet start to the week, stock indexes took a sharp turn lower on Wednesday afternoon, alongside US Treasuries, following a weaker-than-expected auction of 20-year Treasury bonds, which pushed longer-term yields higher and saw the 30-year yield hit its highest level since 2023, though Treasuries across most maturities recovered some ground by the end of the week. The weak auction and subsequent move in yields was partially attributed to credit rating agency Moody’s downgrade of US sovereign debt at the end of the prior week amid concerns about rising US federal debt and fiscal deficits. This appeared to be amplified later in the week after the House of Representatives passed President Donald Trump’s tax bill, which some believe could increase federal debt considerably over the next several years.

Equities continued to slide on Friday after President Trump announced plans to impose a 50% tariff on imports from the EU, effective 1 June, stating that trade talks are “going nowhere.” His announcement also included a threat of 25% tariffs on iPhones unless Apple moves production of the product to the US, sending shares of the consumer technology giant more than 3% lower on Friday.

After hitting a 16-month low in April, US business activity growth rebounded in May, according to S&P Global’s Flash Purchasing Managers’ Index (PMI) survey data. Activity in the services sector improved from a 17-month low in April, jumping from a PMI reading of 50.8 to 52.3 in May (readings above 50 signal expansion, while readings below 50 indicate contraction). The Manufacturing PMI also improved, increasing from 50.2 in April to a 3-month high of 52.3 in May. Both readings were better than consensus estimates.

While future sentiment among businesses remained subdued, it improved from April’s two-and-a-half year low to the highest level since January, “buoyed in part by reduced trade worries following the pause on additional tariffs and accompanying improved economic growth prospects.” However, the report also noted that prices rose at the fastest rate since August 2022, which was “overwhelmingly linked to tariffs,” while export orders fell and “supply chain delays intensified.” Chris Williamson, chief business economist at S&P Global Market Intelligence, also noted that “at least some of the upturn in May can be linked to companies and their customers seeking to front-run further possible tariff-related issues.”

Elsewhere, the National Association of Realtors (NAR) reported that existing home sales unexpectedly fell to a seasonally adjusted annual rate of 4 million in April, down 0.5% from March and the lowest April reading since 2009, while the median sales price rose to $414,000, the 22nd consecutive month of year-over-year (YoY) price increases. According to NAR Chief Economist Lawrence Yun, "Pent-up housing demand continues to grow, though not realised. Any meaningful decline in mortgage rates will help release this demand." Meanwhile, average 30-year mortgage rates climbed to the highest level since mid-February during the week, according to data from Freddie Mac.

In other housing market news, the Census Bureau reported Friday morning that new home sales jumped to a seasonally adjusted annual rate of 743,000 in April, up from March’s reading of 670,000 and well ahead of consensus estimates for 690,000. The median sales price declined to $407,200, down 2% YoY.

Business activity in the euro area unexpectedly contracted in May, as the service sector experienced a sharp deterioration, according to purchasing managers’ surveys compiled by S&P Global. The HCOB Eurozone Composite PMI fell to 49.5 from 50.4 in April, according to a preliminary estimate. Business activity shrank in Germany, while French output shrank for a ninth consecutive month.

The European Commission (EC) reduced its forecast for economic growth in 2025 to 0.9% from the 1.3% it had projected in late 2024. The downward revision reflected rising tariffs and uncertainty surrounding US trade policy. The commission’s latest estimates call for inflation to hit the European Central Bank’s 2% target by mid-2025, earlier than previously expected.

The German economy expanded in the first quarter by 0.4% sequentially, double the initial estimate and a rebound from the 0.2% contraction it registered in the final three months of last year. Stronger household consumption, fixed investments, and net trade drove the fastest pickup in German economic growth since the third quarter of 2022.

A trio of indicators offered the first glimpse of China’s economy following the rapid escalation of trade tensions with the US Industrial output rose a better-than-expected 6.1% in April from a year ago. But retail sales growth, a key consumption barometer, weakened to 5.1% from March’s 5.9% increase, lagging economists’ forecasts. Fixed asset investment—which includes property and infrastructure investment—rose 4% from January to April, trailing estimates, weighed by a steep contraction in property investment.

The surprising uptick in industrial production suggested that China was able to avert a significant slowdown at the start of the US-sparked trade war in April. However, the decline in retail sales growth supported the view of many economists that Beijing needs to roll out more spending incentives to bolster consumer confidence. T. Rowe Price economists believe China should have the financial firepower to reduce the impact of US tariffs and could roll out fiscal stimulus in stages as the government assesses their impact on the economy.

While headline annual inflation remained unchanged at 3.6% in April, core inflation accelerated to 3.5%—the highest reading in over two years. The data reinforced the view that inflationary pressures are becoming more entrenched. Japan’s core machinery orders—a leading indicator of capital spending—climbed 13% in March, beating market expectations for a drop of 1.6% and registering the strongest reading in almost two decades. Still, broader economic signals remained mixed. The au Jibun Bank Japan purchasing managers’ surveys indicated manufacturing activity continued to shrink, and services sector growth slowed in May amid weaker demand and rising uncertainty about US tariffs.

The yield on the 10-year Japanese government bond (JGB) rose to 1.53%, from 1.45% at the end of the previous week, near the highest level since 2008, on rate-hike expectations. The stronger inflation data also pushed the Japanese yen to 142.6 versus the US dollar, the strongest level in over two weeks, from 145.7 at the end of the previous week. Concerns over the US fiscal outlook underpinned the gain as well. Separately, Finance Minister Katsunobu Katō said earlier in the week that he did not discuss exchange rate levels with US Treasury Secretary Scott Bessent at the G7 meetings in Canada, aiming apparently to dampen speculation of coordinated currency intervention.

The Reserve Bank of Australia (RBA) lowered the cash rate by 25 basis points (bps) to 3.85% at the May meeting as expected, marking a resumption of easing cycle. The statement was dovish, noting that the risks to inflation have become "more balanced", "upside risks… have diminished", and "inflation is expected to remain around target", and removing longstanding hawkish language that the Board was "resolute in its determination to sustainably return inflation to target". Key macro forecasts were also notably softer, with trimmed-mean inflation revised down 10bps to 2.6% and unemployment revised up 10bps to 4.3% over the forecast horizon. GDP growth was also downgraded 30bps to 2.1% in 2025 alongside a materially softer outlook for both private consumption and investment.

Last week, the MSCI All Country World Index (MSCI ACWI) lost -1.4% (4.1% YTD).

The US S&P 500 Index declined -2.6% (-0.8% YTD), falling back into negative territory for the year. Growth shares underperformed value stocks, and small caps underperformed large caps. The Russell 1000 Growth Index returned -2.7% (-2.5% YTD), the Russell 1000 Value Index -2.5% (1.2% YTD), and the Russell 2000 Index -3.4% (-8.1% YTD). The technology-heavy Nasdaq Composite shed -2.5% (-2.7% YTD). US markets will be closed on Monday during the Memorial Day holiday. 

In Europe, the MSCI Europe ex UK Index ended the week -0.9% lower (9.9% YTD), snapping five weeks of gains, after US President Trump said he would recommend a 50% tariff on goods from the EU. Major stock indexes retreated. Germany’s DAX Index gave back -0.6% (18.7% YTD), France’s CAC 40 Index slid -1.4% (7.2% YTD), and Italy’s FTSE MIB Index decreased -1.2% (19.1% YTD). Switzerland’s SMI Index lost -0.9% (8.5% YTD). The euro strengthened against the US dollar, closing the week at USD 1.14 for EUR, up from 1.12.

The FTSE 100 Index in the UK gained 0.4% (8.6% YTD), and the FTSE 250 Index declined -1.2% (1.9% YTD). The British pound appreciated against the US dollar, closing the week at USD 1.35 for GBP, up from 1.33.

Japan’s stock markets posted losses over the week. The TOPIX Index retreated -0.2% (-1.2% YTD), and the TOPIX Small Index slid -0.4% (1.1% YTD), as markets increased bets on more monetary policy tightening by the Bank of Japan following hotter inflation data. Meanwhile, lead trade negotiator Ryosei Akazawa reportedly reiterated the government’s position in lobbying the US for broader tariff exemptions as he prepared to leave for Washington for a third round of trade talks.

In Australia, the S&P/ASX 200 Index added 0.3% (4.5% YTD) as the RBA resumed the easing cycle. Australian government bond short-term rates declined while the long-term yields remained largely unchanged, resulting in notable yield curve steepening. The Australian dollar reversed the weakening trend in the previous two weeks and strengthened against the US dollar by 0.8%.

In Canada, the S&P/TSX Composite lost -0.3% (5.8% YTD).

The MSCI Emerging Markets Index was -0.1% lower (10.1% YTD), with the stock markets of China, India, Taiwan, South Korea, and Brazil contributing negatively to performance.

Mainland Chinese stock markets declined as attention returned to the economy after Beijing and Washington struck a temporary trade truce. The onshore CSI 300 Index eased -0.1% (-0.8% YTD), and the Shanghai Composite Index edged down -0.5% (0.4% YTD). Hong Kong's benchmark Hang Seng Index gained 1.2% (19.3% YTD). The MSCI China Index added 0.9% (17.3% YTD). 

In Romania, Bucharest’s mayor, Nicușor Dan, made a massive comeback in the second round of the country’s Presidential election, defeating far-right candidate George Simion with 53% of the votes. Simion initially tried to contest the result, but he later conceded.

According to T. Rowe Price associate portfolio manager and credit analyst Ivan Morozov, the second-round result shows that Romanian society demonstrated a strong sense of consolidation against a political shift to the far right. However, he believes that the election result is just a first step on a very narrow path toward economic stability. Romania seems likely to have a minority government, which may not be particularly stable, and lawmakers will need to turn their attention to the fiscal situation almost immediately. Unless the government in the next couple of months can pass legislation that aims to put Romania’s budget deficit on a sustainable path toward the EU limit of 3% of GDP, Morozov believes there is a possibility that major credit rating agencies will downgrade Romanian sovereign debt by the end of the year.

In Mexico, the central bank held its scheduled policy meeting and reduced its key interest rate, the overnight interbank interest rate, by 50bps, from 9.00% to 8.50%. The decision, which was generally expected, was unanimous among policymakers.

According to the post-meeting statement, policymakers noted that global growth prospects, “particularly those for the US economy, have been revised downwards.” They identified several global risks, such as “escalating trade tensions along with the intensification of geopolitical turmoil and their possible impact on inflation, on economic activity, and on volatility in financial markets.”

As for Mexico, central bank officials noted that the economy “exhibited weakness again during the first quarter” with a growth rate of only 0.2% on the heels of a fourth-quarter contraction. They affirmed that the “environment of uncertainty and trade tensions poses significant downward risks.” Headline and core inflation were measured at 3.93% in April, and policymakers noted that core inflation “accumulated” below 4.00% for eight consecutive months. While they felt that the balance of risks for inflation remained biased to the upside, they also felt that it has improved as “global shocks have been fading.”

The decision to reduce the benchmark interest rate by 50bps was made with consideration of “the current inflationary outlook and the prevailing level of monetary restriction.” As for possible future rate cuts, policymakers stated that they could “continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes.” However, even if they implement additional 50bps rate cuts, they intend to maintain a “restrictive stance” to help bring headline inflation down to their 3% target.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.3% (1.2% YTD), the Bloomberg Global High Yield Index (hedged to USD) -0.3% (2.2% YTD), and the Bloomberg Emerging Markets Hard Currency Aggregate Index returned 0.1% (3.4% YTD).

Over the week, the 10-year Treasury yield rose 3bps, ending at 4.51% from 4.48% (down -6bps YTD). The 2-year Treasury yield declined -1bps, ending the week at 3.99% from 4.00% (down -25bps YTD).

Over the week, the 10-year German bund yield decreased -2bps, ending at 2.57% from 2.59% (up 20bps YTD). The 10-year UK gilt yield increased 3bps, ending the week at 4.68% from 4.65% (up 12bps YTD).