Market Review 19th May 2025
- Simplicity News Desk
- 4 days ago
- 4 min read
Everything you need to know, Simplified!
Summary
Washington and Beijing agreed to a temporary but significant reduction in tariffs, signalling a shift from confrontation to negotiation and raising hopes that the peak of the trade war is now behind us
The broad-based weakness in the US dollar, treasuries and equities has forced a rethink in the administration’s strategy, with the US dollar and bond markets arguably the decisive pressure points
US equities have staged a dramatic rebound, but treasuries and the US dollar have lagged
The US dollar’s weakness looks more like a correction from overvaluation than a loss of reserve status, but the bond market is an increasing concern
The long end of the US yield curve continues to rise, with 30-year yields breaking above 5% this morning - reflecting rising fiscal concerns compounded by Moody’s US debt downgrade
Japan’s inflation is expected to come in at 3.5% this week, increasing pressure on the Bank of Japan (BoJ) to further abandon its ultra-loose policy stance
The rise in long-dated Japanese government bonds (JGB) yields suggests the market sees the BoJ as behind the curve.
Market Review
Confrontation to negotiation
Last week crystallised the pivot from confrontation to negotiation. Washington and Beijing agreed to a temporary but dramatic reduction in tariff levels — an unmistakable de-escalation. It buys time for both sides to pursue a mutually sustainable path forward. Neither economy can bear the full weight of an entrenched trade war, and the sense is growing that the worst of it may now be behind us.
In the aftermath of the Liberation Day tariff announcements, we wrote that the key uncertainty lay in whether trade partners would choose to escalate or negotiate. That uncertainty warranted a higher risk premium across risk assets - hence the sharp fall in markets. We also said that Trump was ultimately a negotiator, and that the tariffs were unlikely to represent his intended endpoint.
That view has been validated. What has surprised us is the speed of the retracement, in rhetoric and policy. The administration clearly underestimated the scale and breadth of the negative market reaction - particularly the rare confluence of weakness across all three US pillars: the dollar, treasuries, and equities. It was likely the sell-off in the US dollar and bond yields that led to the 90-day reprieve not the decline in equities.
There may have been a shift in trade policy leadership within the administration too, away from the tariff hawks (US Secretary of Commerce, Howard Lutnik and Counsellor to the President, Peter Navarro) to the doves (Secretary to the Treasury, Scott Bessent and Trade Representative, Jamieson Greer). The recent China trade talks were led by the doves, not the hawks. We still believe that some form of punitive tariff on China is likely but expect a more measured approach to trade policy going forward.
Where concerns arise
The rebound in US equities has been dramatic. Last week the S&P 500 rose 5.3%, pushing year-to-date returns back into positive territory - remarkable, considering the index was down 15% just a month ago.
But the other two legs of the stool - the US dollar and treasuries - have not recovered in the same way. The US dollar index remains 6.8% weaker year-to-date, suggesting continued net selling of US assets and possibly a reassessment of the dollar’s safe-haven status. Gold’s 23% year-to-date rally only adds fuel to that speculation. That said, the US dollar’s decline likely reflects a correction from peak exuberance at year-end, rather than a structural loss of reserve status. The slight rebound last week on the China agreement reinforces that view.
The bond market remains the biggest concern. The 30-year US treasury yield has risen from 4.40% in early April to 4.94% at the close last week and breaking 5.0% this morning - an aggressive steepening of the curve. Bond yields continued to rise, even in the face of a softer-than-expected inflation print, underlining that fiscal fears, not price pressures, are now the dominant driver.
The issue isn’t just debt levels - it’s the absence of any clear plan to stabilise them. Extended or new tax cuts not offset by spending restraint or tariff revenue only deepen the hole. Early hopes that tariffs would generate meaningful revenue have faded now that many have been rolled back. The savings from the Department of Government Efficiency (DOGE) too look increasingly underwhelming. At the end of the week Moody’s downgraded US debt from its AAA rating. Moody’s was the last of the three major ratings firms still giving the US its top rating. The downgrade reflects successive administrations’ failures to tackle the US deficit and ballooning debt.
The market will keep demanding a steeper curve as long as this dynamic holds. Such a trajectory risks triggering a fiscal credibility shock; a Truss moment. The fiscally conservative narrative set out at the start of Trump’s term must reassert itself if confidence is to be restored.
The week ahead
Wednesday: UK Consumer Price Index (CPI) inflation
Our thoughts: Inflation is expected to jump to 3.3% in April, up from 2.6% in March. This sharp rise will reinforce the Bank of England’s cautious stance.
Friday: Japan CPI inflation
Our thoughts: Japanese inflation is forecast at 3.5%, strengthening the case for further tightening from the BoJ. The BoJ appears increasingly behind the curve in exiting its ultra-loose stance, especially given strong wage growth and broadening inflationary pressures. Yields at the long end of the JGB curve continue to climb — perhaps a sign that the market sees the BoJ as literally behind the curve.
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