Weekly Market Recap

The UK’s economy grew faster ahead of the imposition of US tariffs on 2 April. In the first quarter, gross domestic product (GDP) expanded 0.7% sequentially, more than the 0.6% forecast in a Reuters poll and up from 0.1% in the final three months of 2024. Strong increases in services, investment, and exports drove the expansion.

Meanwhile, the Office for National Statistics reported that the labour market cooled at the start of the year. Based on the labour force survey that is being overhauled, the unemployment rate rose to 4.5% from 4.4% in the three months through March. The number of payrolled employees fell the most in a year between February and April, tax office data showed. Private sector wages, excluding bonuses—a gauge of underlying inflation pressure monitored by the Bank of England (BoE)—rose in the January–March period by 5.6% from year-ago levels, the smallest increase since the three months through November 2024.

BoE Chief Economist Huw Pill said that inflation in the UK could prove stronger than the central bank expects and that interest rates might need to stay higher than investors think. At a BoE conference, policymakers Clare Lombardelli and Megan Greene, who voted to cut rates at the central bank’s last meeting, highlighted persistent inflationary pressures in the labour market and urged caution on cutting rates further without more evidence that inflation was receding.

US equities posted strong gains for the week, with positive sentiment largely driven by news that the US and China had agreed to a substantial de-escalation of trade tensions following talks in Switzerland. The agreement between the world’s two largest economies will see most of their recently implemented tariffs suspended for 90 days while further trade negotiations continue, which will bring US tariffs on most Chinese goods down from 145% to 30%, while China’s levies on US imports will drop from 125% to 10%. Several other trade-related headlines—including news of an agreement that will allow Saudi Arabia to purchase large amounts of advanced artificial intelligence chips from US companies—appeared to help fuel the positive move in stocks during the week, putting most indexes firmly back above their 2 April levels by Friday’s close.

Monday’s tariff-suspension-driven rally continued through Tuesday, supported by the report of the Bureau of Labor Statistics (BLS) of lower-than-expected consumer price inflation in April. According to the report, April’s consumer price index (CPI) rose 2.3% year-over-year (YoY), a tick below consensus estimates for a 2.4% increase and the slowest annual pace since early 2021, before inflation began to surge and the Federal Reserve started its rate-hiking cycle. On a month-over-month basis, both the headline and core (excluding food and energy) CPI rose 0.2%, below estimates for 0.3% increases.

The BLS also reported an unexpected decline in its producer price index (PPI), which measures inflation at the wholesale level. On Thursday, the BLS reported that its PPI reading for April dropped 0.5% from March compared with estimates for a 0.2% rise. Notably, the report showed that a significant portion of the drop in April was attributable to declining margins, which could indicate that companies have thus far been absorbing some of the costs of higher tariffs.

Elsewhere, the Census Bureau reported Thursday that retail sales grew just 0.1% in April, a notable decline from March’s gain of 1.7%. The report reflected a pullback in spending across several categories that surged in March, including sales at motor vehicle and auto parts dealers, sporting goods, and apparel. This could indicate that consumers were tempering their spending following a rush to buy goods in March ahead of broad tariff increases.

The week’s economic calendar wrapped up on Friday with the preliminary reading of the University of Michigan’s Index of Consumer Sentiment, which declined for a fifth consecutive month in May to 50.8, down from 52.2 in April. “Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60% in April; uncertainty over trade policy continues to dominate consumers’ thinking about the economy,” according to Surveys of Consumers Director Joanne Hsu. Expectations for inflation in the year ahead jumped to 7.3%, up from 6.5% in April.

Industrial production in the euro area jumped in March, suggesting the sector is emerging from a two-year recession. Strong increases in capital goods and durable consumer goods drove the monthly expansion of 2.6%, exceeding February’s 1.1% increase. Germany’s industrial output surged 3.1%. Also, the eurozone’s trade surplus swelled to a record EUR 36.8 billion in March, from EUR 22.8 billion a year earlier, fuelled by a sharp rise in exports, particularly to the US. Employment rose by 0.3% in the first quarter, accelerating from 0.1% in the previous period.

Chinese stocks rallied early in the week after the outcome of tariff negotiations with the US last weekend. The deal with the US, which called for both sides to temporarily lower tariffs on each other’s imports, exceeded expectations in China and ended up meeting nearly all of Beijing’s core demands. However, stocks pared their gains starting on Wednesday as a more favourable tariff outlook dimmed hopes for a substantial stimulus package from Beijing.

Expectations that a spiralling trade war with the US would spur the government to ramp up measures to bolster the economy have supported Chinese stocks in recent weeks. Earlier in May, the People’s Bank of China unexpectedly cut its reserve requirement ratio—the amount of cash that banks must keep in reserve—by half a percentage point and trimmed the seven-day reverse repurchase rate by 10 basis points (bps) to 1.4%. However, hopes for further government support have been tempered in the near term as the US and China work toward a broader agreement over the next three months.

Amid ongoing trade negotiations between Japan and the US, Japan continued to push for a review of all tariff measures imposed by the US, calling for a reassessment of duties on autos and other goods.

The yield on the 10-year Japanese government bond (JGB) rose to 1.45%, from 1.35% at the end of the previous week, as progress in US-China trade negotiations dampened demand for assets perceived as safer. While the yen weakened considerably on the week’s first trading day on waning safe-haven demand, it strengthened over the rest of the week, leaving it in the low JPY 145 range against the US dollar, broadly unchanged from the prior week. This was amid a broader rally in Asian currencies, which some attributed to speculation that the US could advocate for a weaker dollar as part of its ongoing trade negotiations.

Japan’s economy contracted by more than expected in the first quarter of 2025, with GDP falling an annualised 0.7% quarter on quarter (QoQ), versus consensus estimates of a 0.2% QoQ decline and following a 2.4% QoQ expansion in the fourth quarter of 2024. The contraction, which marked the first decline in a year, owed much to sluggish private consumption, as well as concerns about the potential impacts of US trade tensions and weak demand from Japan’s trading partners, notably China. The Bank of Japan recently downgraded its economic growth and inflation forecasts, citing tariff developments. The central bank’s core stance remains that it will raise interest rates if the economy and prices develop in line with its forecasts.

Australia’s employment increased by 89,000 in April, well above the market expectation of 20,000. It is worth noting that a rebound in labour force participation drove the increase, so the unemployment rate was stable at 4.1%. Hours worked rose 1.1% YoY, well below the employment growth of 2.7% YoY. Australia’s wage price index increased 0.9% QoQ in the first quarter, slightly above consensus. The surprise largely reflected a one-off stronger wage growth in the health and social assistance sector following government-led decisions to mandate higher pay for aged care and childcare workers. Excluding this sector, the private-sector growth eased to 0.5% QoQ – the slowest pace since early 2022.

Last week, the MSCI All Country World Index (MSCI ACWI) rallied 4.1% (5.6% YTD).

The US S&P 500 Index surged 5.3% (1.8% YTD). Growth shares strongly outperformed value stocks, and small caps underperformed large caps. The Russell 1000 Growth Index returned 7.1% (0.2% YTD), the Russell 1000 Value Index 3.3% (3.8% YTD), and the Russell 2000 Index returned 4.5% (-4.8% YTD), notching positive returns for the sixth straight week. The technology-heavy Nasdaq Composite jumped 7.2% (-0.2% YTD), leading the way for major indexes. 

In Europe, the MSCI Europe ex UK Index ended the week 2.3% higher (10.9% YTD), as sentiment improved after de-escalating the trade war between the US and China. Major stock indexes gained. Germany’s DAX Index put on 1.1% (19.4% YTD), France’s CAC 40 Index added 2.3% (8.8% YTD), and Italy’s FTSE MIB Index climbed 3.3% (20.5% YTD). Switzerland’s SMI Index rose 2.2% (9.4% YTD). The euro weakened against the US dollar, closing the week at USD 1.12 for EUR, down from 1.13.

The FTSE 100 Index in the UK gained 1.8% (8.1% YTD), and the FTSE 250 Index rose 2.4% (3.1% YTD). The British pound was stable against the US dollar, closing the week at USD 1.33 for GBP.

Japan’s stock markets registered modest gains over the week. The TOPIX Index advanced 0.3% (-1.0% YTD), and the TOPIX Small Index added 0.3% (1.5% YTD). A de-escalation in the US-China trade dispute, with both countries agreeing to substantially reduce tariffs, albeit temporarily, helped lift sentiment.In Australia, the S&P/ASX 200 Index added 1.7% (4.2% YTD), rising each day in the past week, as global markets cheered the temporary tariff tension de-escalation between the US and China. Australian government bond yields increased notably on receding global recession risk, with the curve largely unchanged. 
The Australian dollar strengthened modestly against the US dollar by 0.2%.

In Canada, the S&P/TSX Composite put on 2.2% (5.8% YTD).

The MSCI Emerging Markets Index was 3.1% higher (10.2% YTD), with the stock markets of China, India, Taiwan, South Korea, and Brazil contributing positively to performance.

Mainland Chinese stock markets rose for the week after news of the de-escalation in US trade tensions. The onshore CSI 300 Index added 1.2% (-0.7% YTD), and the Shanghai Composite Index edged up 0.8% (0.9% YTD). Hong Kong's benchmark Hang Seng Index gained 2.3% (17.9% YTD). MSCI China Index climbed 2.7% (16.3% YTD). 

In Hungary, the government reported that YoY inflation in April was 4.2%. While this was lower than the 4.7% YoY reading for March, it was higher than expected.

According to T. Rowe Price associate portfolio manager and credit analyst Ivan Morozov, the month-over-month decline in inflation was driven by food prices, as the government introduced price caps on a number of food items; more are expected in May. Morozov perceives signs of a small acceleration in core prices outside of food items. He believes that the latest inflation data mask real inflation pressures in the economy to some degree. As a result, he believes it is increasingly unlikely that the central bank will reduce short-term interest rates later this year.

In Brazil, the government reported that inflation in April increased at a month-over-month rate of 0.43%, marginally above consensus expectations for 0.42%. The YoY inflation rate was measured at 5.6%.

According to T. Rowe Price analysts, the underlying details of the report were mildly worse than expected, as lower-than-expected non-core gasoline and airfare prices offset slightly higher-than-anticipated core inflation. However, the latest reading is not that different from recent inflation reports, which showed some non-core disinflation. Still, no sign yet of core disinflation to go with an incipient slowdown in economic activity stemming from several interest rate increases since September.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.1% (1.4% YTD), the Bloomberg Global High Yield Index (hedged to USD) 0.9% (2.6% YTD), and the Bloomberg Emerging Markets Hard Currency Aggregate Index returned 0.3% (3.3% YTD).

US Treasury yields fluctuated throughout the week in response to various economic data reports. However, yields across most maturities were generally higher heading into Friday morning, leading to negative returns for the asset class. Over the week, the 10-year Treasury yield rose 10bps, ending at 4.48% from 4.38% (down -9bps YTD). The 2-year Treasury yield rose 11bps, ending the week at 4.00% from 3.89% (down -24bps YTD).

Meanwhile, US investment-grade corporate bonds posted modest gains, outperforming Treasuries in the risk-on environment. High yield bonds also traded higher as equities rallied on encouraging trade headlines, and the new deals priced during the week were met with solid demand.

Over the week, the 10-year German bund yield increased 3bps, ending at 2.59% from 2.56% (up 23bps YTD). The 10-year UK gilt yield increased 8bps, ending the week at 4.65% from 4.57% (up 8bps YTD).