Market Review 27th May 2025

Everything you need to know, Simplified!

Summary

• US government bond yields continued to rise over the past week, driven primarily by movements at the longer end of the yield curves

• The United States’ largest creditor, Japan, recently confessed that they are facing a fiscal situation ‘worse than Greece’s’

• UK Inflation jumped to 3.5% as a result of increases in household bills

• Global equities ended the week lower against a difficult backdrop; President Donald Trump’s tariff rhetoric with the European Union also hindered progress

• Gold hovered around its recent peak of US$3,300.

  
  

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Market Review

United States

Government bond yields continued to climb over the past week, with the increase led by strong activity at the long end of the yield curve, relative to the short end. This phenomenon is known as ‘bear steepening’ and is usually indicative of rising inflation expectations or lower confidence in governments. In this case, it appears that there are growing concerns over rising government debt and a perceived lack of urgency from US policymakers in addressing fiscal issues.

Moody’s (credit rating agency) recent downgrade exacerbated the situation and according to the White House Office of Management and Budget’s Russell Vought, it was timed to ‘jeopardise the bill’. Whether this is true or not, it spurred the House of Representatives to pass the tax-cutting legislation, known colloquially as the ‘big, beautiful bill’, albeit by the thinnest of margins.

On Wednesday there was weak demand for 20-year treasuries at the auction. Investors accepted a yield of 5.047% on the 20-year note, which was notably higher than the 4.613% average from the previous six auctions. This marked the first time since October 2023 that the treasury issued a 20-year note with a yield exceeding 5%.

As interest expenses continue to rise, borrowing costs are becoming an increasingly important factor influencing fiscal outcomes, which will now be closely tied to movements in yields. Federal projections rely on the assumption that interest rates and yields will decline over time, easing pressure on the deficit. However, if inflation remains high and the economy stays resilient, the Federal Open Market Committee (FOMC) will have little incentive to cut rates.

In foreign exchange markets, the US dollar softened over the past week. The currency initially strengthened following the recent China tariff agreement as upgraded US growth forecasts and easing concerns over trade war escalation and supply chain disruptions supported the greenback. However, this boost appears to have been short-lived.

US equities were led lower by the technology sector over the week, with the so-called magnificent seven (Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia and Tesla) bearing the brunt of investor pessimism. Sentiment turned sharply negative on Friday, as President Trump threatened the European Union with 50% tariffs, and noted he was ‘not looking for a deal’.

Japan

Prime Minister Shigeru Ishiba informed members of parliament that the government cannot support any tax cuts financed by new debt, despite increasing calls for economic stimulus ahead of the July upper house elections. Japan currently holds US$1.13 trillion in US treasury securities, while its own debt-to-GDP ratio stands at approximately 250%.

Notably, demand at Japan’s own 20-year bond auction was the weakest since 2012, highlighting market concerns over who will step in to buy as the Bank of Japan (BoJ) scales back its substantial debt purchases. To put this into perspective, the BoJ currently owns more than half of the Japanese government bond market.

This is against a backdrop of the recent GDP numbers for Q1 2025 which showed that the economy contracted due to tepid exports on the back of tariffs. In addition, the core/core inflation rate, which excludes energy and food, remained stubbornly above target for the third year running, hitting 3% in April, which was a two-year high.

This was spurred by strong private consumption on the back of higher wages. Economists have begun to call this a structural change in the traditional conservatism of Japan’s consumer. Most historic predictions of paradigm shifts in Japan have failed miserably, but this time could genuinely be different.

This has led to the markets pricing in another rate hike in the second half of this year to 75 basis points up from the current 50.

UK

Economists dubbed last month ‘Awful April’, owing to steep rises in energy prices which came through in higher-than-expected headline CPI numbers. Inflation rose to 3.5%, above forecasts of 3.3% and higher than March’s 2.5%. Gas was the primary culprit, with the rate of price change surging to double-digits, hitting 12.2% vs negative 12% for the month prior. Core CPI (CPI excluding energy, food, alcohol and tobacco) rose by 3.8% in the 12 months to April 2025, up from 3.4% in the 12 months to March. Services inflation was also above estimates, but if you strip out volatile measures such as holidays and airfares, it seems to be trending lower.

Although this triggered remarks around a return to a cost-of-living crisis, economists were quick to dismiss the numbers as transient on the back of supply chain shocks relating to tariff uncertainty and volatile energy prices.

Gilts didn’t escape unscathed and yields reached their highest levels since the 1990s. Although this was correlated in part to the broader developed market sell off in US treasuries and Japanese government bonds, there were issues closer to home too. The UK budget deficit was larger than expected in April, despite the increase in taxation on businesses. Additionally, private sector output fell for the second consecutive month, which has backed the Chancellor into an even tighter corner.

The FTSE 100 ended the week marginally positive, although the FTSE 250, the domestic bellwether, finished over 1% down. This is unsurprising given the economic backdrop noted above, albeit it’s worth noting that the 250 generates more than half of its profits from abroad and has become less reliable as a domestic indicator.

Gold

Gold struggled to break higher, in part due to the S&P Global Service PMI rising to 52.3 on Thursday, surprising to the upside and bolstering the notion that the US economy is in good health, contrary to what confidence indicators are predicting.

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The week ahead

Tuesday: US & German consumer confidence

Our thoughts: US consumer confidence reached a five-month low and hit Covid-19 trough levels last month. Although there might be some respite given the recent trade agreements, we should expect further volatility. Germany has been on an improving trend owing to the stable political situation and looks likely to continue this trajectory.

Wednesday: FOMC minutes

Our thoughts: The FOMC minutes have become increasingly impactful on stocks, bonds and currency markets in recent months and we should expect more of the same. Some economists believe the US Federal Reserve (Fed) could deliver a relatively cautious economic outlook and that could lead to further pressure on the dollar.

Thursday: US GDP (second preliminary), US pending home sales, US initial claims

Our thoughts: A big litmus test for the economy. Consensus for the second preliminary GDP numbers are for -0.30% which is unchanged versus last month. Pending home sales are expected to drop to -1% in the wake of economic and consumer uncertainty, whereas initial claims are likely to come in at the same level to last month. These figures are difficult to gauge with certainty, especially given the positive surprise in Service sector PMIs.

Friday: US PCE & Germany CPI

Our thoughts: The Fed’s preferred gauge, the ‘PCE core deflator’, which excludes food and energy, is expected to come in unchanged at 2.60%. Surprisingly, Germany’s is also expected to remain the same at 2.20%. There is obviously room for negative surprises here and the markets may not be discounting this. Other countries across the EU are also reporting inflation figures at the same time, in addition to Japan’s Tokyo CPI index, a reliable indicator for broader price pressure across the country.

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