Weekly Market Recap

Gross domestic product (GDP) shrank in April by 0.3% sequentially, after growing 0.2% in March. The decline—the first in five months and the sharpest since October 2023—was driven by downturns in services and production output. Still, GDP in the three months through April grew by 0.7%. Exports of goods to the US fell by GBP 2 billion in April, the largest monthly decrease since records began in 1997.

The labour market cooled further following increases in employer social security contributions and the minimum wage. Unemployment hit a four-year high of 4.6% in the three months through April. Annual growth in private-sector pay excluding bonuses—closely monitored by the Bank of England—rose by 5.2% over the period, the slowest pace since the third quarter of 2024.

Major stock indexes were broadly higher through Thursday, buoyed by some better-than-expected economic data releases as well as reports that trade talks between the US and China had led to a preliminary agreement to ease recent trade tensions. Several other optimistic trade-related headlines appeared to boost sentiment during the week, including comments from Treasury Secretary Scott Bessent that indicated the Trump administration’s 90-day pause on tariffs could be extended for countries negotiating in “good faith.”

However, sentiment quickly turned negative on Friday morning on news that Israel had launched a series of airstrikes targeting Iran’s nuclear facilities and military leaders, with a pledge of more attacks to come, to which Iran responded with a retaliatory attack later on Friday. The significant escalation in tensions sent oil prices surging, benefiting energy stocks, while the broader indexes fell sharply and gave back gains from earlier in the week.

In addition to positive trade news, optimism early in the week appeared to be partially supported by the Bureau of Labor Statistics’ (BLS) report of cooler-than-expected inflation in May. On Wednesday, the BLS reported that its consumer price index (CPI) rose 0.1% month over month (MoM), down from 0.2% in April and below consensus expectations for a 0.3% increase. On a year-over-year (YoY) basis, prices rose 2.4%, up from April’s four-year low of 2.3% but below expectations for a 2.5% increase. Core CPI, which excludes volatile food and energy costs, rose 2.8% YoY, unchanged from April and a tick below estimates for a 2.9% increase.

Meanwhile, inflation at the wholesale level also undershot expectations in May, with the BLS’s producer price index rising 0.1% during the month. This was up from a modest decline for the index in April, but below estimates for a 0.2% increase, indicating that the price impact from tariffs thus far has been more muted than many market participants anticipated.

Sentiment among small business owners improved in May following four consecutive months of declines, according to the National Federation of Independent Business (NFIB) business optimism index. The index increased to 98.8 in May, up three points from the prior month and above the 51-year average of 98. According to NFIB Chief Economist Bill Dunkelberg, “owners reported more positive expectations on business conditions and sales growth,” although “uncertainty is still high among small business owners.”

Consumer sentiment also showed signs of improvement, according to the University of Michigan’s preliminary reading of its June Index of Consumer Sentiment. The index improved to 60.5 from 52.2 in May, snapping a six-month streak of declining readings, as “consumers appear to have settled somewhat from the shock of the extremely high tariffs announced in April and the policy volatility seen in the weeks that followed,” according to Surveys of Consumers Director Joanne Hsu. Expectations for inflation in the year ahead plunged to 5.1% from 6.6% in the prior month.

Industrial output in the euro area in April contracted 2.4% sequentially, much more than the 1.8% estimated by analysts in a FactSet poll. The bloc’s trade surplus shrank much more than expected to EUR 9.9 billion in April from EUR 37.3 billion in March.

Recent comments from European Central Bank (ECB) officials, including President Christine Lagarde and Chief Economist Philip Lane, have sparked speculation that the ECB may pause its easing cycle in July as policymakers assess the economic impact of potential US tariffs. Lagarde reiterated that the ECB has reached a “good position” to meet medium-term inflation targets, describing the latest policy decision as "well calibrated."

T. Rowe Price Chief European Economist Tomasz Wieladek says that the ECB has signalled a change in its reaction function. Even though the central bank’s forecasts for inflation and growth are more bearish than they were in May, officials have also hinted that it is close to the end of the rate-cutting cycle. He believes the bar for downside data surprises to make way for more cuts is high and that the ECB may lower borrowing costs only once or twice more.

China’s CPI declined in May for the fourth straight month year on year, the country’s statistics bureau reported. Factory deflation continued for the 32nd straight month, with producer prices sinking the most in nearly two years, according to Bloomberg. Deflation is regarded as a fundamental economic challenge for China, where a multi-year property crisis has sapped domestic demand. Economists’ outlook for prices in China remains weak despite a more bullish view of the broader economy in the near term after Beijing and Washington agreed to a temporary tariff reprieve in May.

Chinese stocks rose to their highest level for the week on Wednesday on news that officials from China and the US agreed on a preliminary deal to reduce trade tensions following a two-day meeting in London. Details regarding the deal were scarce, however, and are pending approval from the respective leaders of both countries.

With US President Donald Trump indicating new plans to set unilateral tariffs on key trading partners, as well as hinting at a further increase to import levies on cars, the yield on the 10-year Japanese government bond fell to 1.40%, from the prior week’s 1.45%. Investors’ focus was on the upcoming Group of Seven (G7) summit, viewed as potentially setting the stage for Japan and the US to reach a trade agreement following two months of negotiations. However, Prime Minister Shigeru Ishiba said that Japan would not compromise its interests by prioritising a quick deal and emphasised that it was important to achieve an agreement that is beneficial to both countries.

On the economic data front, revised figures showed that Japan’s GDP growth was flat over the first quarter of 2025 compared with the prior three-month period, up from the flash estimate of a 0.2% quarter-on-quarter contraction. Private consumption, which accounts for more than half of Japan’s economy, was slightly higher than anticipated. Separate data showed that Japan’s industrial production fell 1.1% MoM in April, more than preliminary estimates of a 0.9% decline and down from a 0.2% gain in March.

NAB business survey indicated that Australia's business conditions fell 2 points to 0 in May, the lowest level since August 2020. This was largely driven by a sharp fall in the retail sector and weaker employment. Net overseas arrivals have stayed broadly stable in annual terms in recent months. The risk of further downward revisions to population growth remains, which may result in lower levels of employment growth.

Last week, the MSCI All Country World Index (MSCI ACWI) lost -0.2% (6.9% YTD).

The US S&P 500 Index retreated -0.4% (2.2% YTD). Growth shares ended the week on par with value stocks, and small caps underperformed large caps. The Russell 1000 Growth Index returned -0.5% (1.2% YTD), the Russell 1000 Value Index -0.5% (3.1% YTD), and the Russell 2000 Index -1.5% (-5.2% YTD). The technology-heavy Nasdaq Composite gave back -0.6% (0.8% YTD).

In Europe, the MSCI Europe ex UK Index ended the week -1.8% lower (10.0% YTD) amid renewed uncertainty about US trade policy and escalating geopolitical tensions in the Middle East. Major stock indexes retreated. Germany’s DAX Index dropped -3.2% (18.1% YTD), France’s CAC 40 Index decreased -1.5% (6.9% YTD), and Italy’s FTSE MIB Index fell -2.9% (19.0% YTD). Switzerland’s SMI Index lost -1.8% (8.0% YTD). The euro appreciated against the US dollar, closing the week at USD 1.15 for EUR, up from 1.14.

The FTSE 100 Index in the UK gained 0.2% (10.4% YTD), and the FTSE 250 Index edged up 0.1% (4.4% YTD). The British pound strengthened against the US dollar, closing the week at USD 1.36 for GBP, up from 1.35.

Amid an escalation in geopolitical risk in the Middle East and an uptick in trade-related concerns, Japan’s stock markets declined over the week. The TOPIX Index lost -0.5% (-0.4% YTD) and the TOPIX Small Index gave back -0.2% (3.5% YTD). As investors sought assets perceived as safer, the Japanese yen modestly strengthened to JPY 144.1 against the US dollar, from 144.9 at the end of the previous week, weighing on the profit outlooks of Japan’s export-oriented industries.

In Australia, the S&P/ASX 200 Index tacked on 0.4% (6.9% YTD) thanks to the positive progress in US-China trade talks in London. Australian government bond yields abated with the curve flattening. The Australian dollar remained largely unchanged versus the US dollar.

In Canada, the S&P/TSX Composite rose 0.4% (8.5% YTD).

The MSCI Emerging Markets Index ended the week 0.8% higher (12.2% YTD), with the stock markets of China, Taiwan, South Korea and Brazil contributing positively to performance, while that of India contributed negatively.

Mainland Chinese stock markets declined as the latest inflation snapshot underscored the deflationary pressures weighing on China’s economy. The onshore CSI 300 Index was broadly flat (-1.0% YTD), and the Shanghai Composite Index shed -0.1% (1.5% YTD). Hong Kong's benchmark Hang Seng Index edged up 0.7% (21.7% YTD). The MSCI China Index added 0.7% (18.0% YTD). 

In Poland, the Minister Donald Tusk won a vote of confidence in the Polish legislature on Wednesday, with a final vote count of 243 to 210. Tusk, who represents a pro-Europe coalition government, called for the confidence vote himself in the wake of the second round of the presidential election on 1 June. That election ended with nationalist candidate Karol Nawrocki narrowly defeating liberal candidate Rafal Trzaskowski, the mayor of Warsaw.

In Colombia, Colombian risks have increased substantially as of late, including the government reportedly suspending its fiscal rule and significantly increasing its budget deficit target, even as political turmoil has overshadowed the incipient electoral race with an assassination attempt of a right-wing presidential candidate and several bombings in the southwest part of the country. These developments come even as the Petro government has taken a divisive stance against the opposition, including a planned referendum that would allow the president to curtail Congress, which has hindered his populist reform agenda during his last year in office. While T. Rowe Price sovereign analyst Aaron Gifford believes the financial markets reflect many of these risks, he currently sees potential for a regime change next year. However, the election is still many months away, and political uncertainty is likely to persist for some time.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned 0.4% (2.1% YTD), the Bloomberg Global High Yield Index (hedged to USD) 0.2% (3.4% YTD), and the Bloomberg Emerging Markets Hard Currency Aggregate Index returned 0.6% (5.0% YTD).

US Treasuries generated positive returns last week as yields declined in response to the week’s economic data releases, particularly the softer-than-expected CPI report on Wednesday; however, Treasuries across most maturities gave back some gains on Friday morning following Israel’s attack on Iran. A strong 10-year Treasury auction on Wednesday also appeared to boost sentiment in the market, as recent concerns that Treasuries could be losing some attractiveness as an asset class seemed to ease. Over the week, the 10-year Treasury yield decreased by -11bps, ending at 4.40% from 4.51% (down -17ps YTD). The 2-year Treasury yield declined -9bps, ending the week at 4.95% from 4.04% (down -29ps YTD).

Over the week, the 10-year German bund yield decreased -4bps, ending at 2.53% from 2.57% (up 17bps YTD). The 10-year UK gilt yield decreased by -9bps, ending the week at 4.55% from 4.64% (down -2bps YTD).