Market Review 2nd June 2025

Everything you need to know, Simplified!

Summary

• ‘TACO’ trade lifts markets: Equities rallied as Trump delayed EU tariffs, reinforcing the market view that trade policy is mostly posturing - the so-called ‘TACO trade’ (Trump Always Chickens Out)

• Bond rally led by Japan: Japanese officials hinted at reduced long-dated issuance, triggering a rally in Japanese government bonds and spilling over into US treasuries, where 30-year yields fell back below 5%

• Relief rally, not resolution: The fall in yields reflects temporary relief, fundamental concerns over US fiscal sustainability and thinning foreign demand remain unaddressed

• This week - US jobs data: The gap between soft data (surveys, sentiment) and hard data (employment, activity) is narrowing. Soft data has rebounded, while hard data is beginning to soften. Friday’s payrolls report is expected to show 125k jobs added in May, further evidence of this convergence.

  
  

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Market Review

TACO trade drives markets higher

Equity markets bounced back last week as US trade policy continued to dominate the narrative. Only two days after announcing a 50% tariff on the EU, President Trump delayed them to 9 July to allow for negotiations, catalysing the bounce. The US administration’s consistent backing down has led to the rise of the acronym ‘TACO’ (Trump Always Chickens Out), and the ‘TACO trade’ which is gaining traction among traders who now see these tariff tantrums as buying opportunities rather than lasting threats.

Clearly there is an element of negotiating strategy here from the US, although it relies more on blunt force than measured diplomacy which has introduced huge uncertainty. According to BCA Research’s ‘geomacro’ strategist Marko Papic, Trump’s playbook contains the following seven steps of ‘maximum pressure’:

1. Ask for the moon: start with maximalist demands

2. Whip out your ‘big button’, meaning threaten and bluster

3. Punch someone in the mouth: to succeed you need to show that you’re prepared to follow through

4. Break bread: negotiate, be generous and magnanimous

5. Leave the bride at the altar: throw everything off at the 11th hour

6. Kiss and make up: commence negotiations again

7. Make a deal: which, naturally, is “the best deal ever” until the next one.

So far, it looks like steps one to four have transpired. Markets are recovering as preliminary deals take shape and as tariffs have been reduced. But will steps five and six be skipped altogether? This is what market prices seem to suggest.

Elsewhere on the tariff front, markets cheered a ruling from the Court of International Trade, which struck down tariffs imposed under emergency powers. Trump has appealed, and the ruling will likely only delay tariffs rather than block them altogether. Equities surged on the news.

Meanwhile, consumer sentiment recovered dramatically, as measured by the Conference Board Consumer Confidence index, with the May reading ending four straight months of declines. This was driven by softening of trade tensions particularly between the US and China. Finally strong corporate earnings helped support a positive backdrop.

Bond vigilantes back off

After weeks of surging long dated global bond yields, last week saw a reverse course, led by Japan. Thirty-year Japanese government bonds, yields of which had climbed to 3.2% after a weak auction rattled confidence, finally found buyers following an unusual concession from the Ministry of Finance. Officials signalled they would consider cutting long-dated issuance in response to market conditions; a rare admission that the supply side needs managing. That helped flatten the curve and steadied what had become an increasingly disorderly market.

The shift in Japan triggered a sympathy rally in other long bonds, including US treasuries, where 30-year yields fell back below 5%. But the structural concerns that pushed them higher remain unresolved. The 30-year treasury yield had risen from 4.40% in early April to over 5.0% before this pullback, a steepening of the curve driven by fiscal fears.

Foreign demand is thinning. Talk of fiscal conservatism has receded. Debt levels keep rising. There is no credible plan to stabilise the US deficit. For now, bond vigilantes are backing off, but the unsustainable status quo remains, and they still lurk beneath the surface.

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The week ahead

Tuesday and Thursday: Eurozone inflation and European Central Bank (ECB) rate decision

Our thoughts: With inflationary pressures having receded and the economy having slowed there is little reason to keep policy in marginally restrictive territory. Eurozone inflation is expected to slow to 2.0% year-on-year and the ECB are almost certain to cut rates to what is generally perceived as the long-run equilibrium (neutral rate that is nether accommodative nor restrictive).

Friday: US employment data

Our thoughts: A notable divergence has opened between soft and hard US data with surveys and sentiment painting a bleak picture while actual activity remains solid. Lately, the two have begun converging: soft data is rebounding, and hard data is starting to soften. That trend is likely to continue this week, with labour market data expected to show some slackening but not to any alarming degree. Economists forecast 125k new jobs in May (down from 175k in April), with the unemployment rate steady at 4.2%.

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