Macroeconomic Events
In the US, April’s nonfarm payrolls rose by 177,000, surpassing expectations and signaling continued resilience in the labor market despite mounting trade-related pressures. The unemployment rate held steady at 4.2%, while average hourly earnings rose 0.2% for the month and 3.8% year-over-year, both slightly below forecasts. At its May 6–7 meeting, the Federal Reserve kept interest rates unchanged at 4.25%–4.5%, emphasizing a cautious stance amid rising risks of both inflation and unemployment. Fed Chair Jerome Powell noted the unpredictability of the current environment and stated the central bank is in a “good position to wait and see” before making further moves. Inflation, as measured by the consumer price index, eased slightly to 2.3% in April, its lowest level since February 2021. Core CPI rose 2.8% year-over-year, driven primarily by shelter costs. Despite softening price pressures, the Fed remains hesitant to cut rates given persistent inflation above its 2% target and uncertainty over the long-term effects of tariffs.Markets adjusted their expectations accordingly, now forecasting the Fed’s first rate cut in September, with only two reductions expected by year-end — down from earlier projections of three or four.
Significant progress on trade policy was made in May. On May 12, the US and China agreed to suspend most tariffs for 90 days, reducing average rates from 125% to 10%. This breakthrough, announced jointly by both countries, marked a notable de-escalation and lifted investor sentiment. In a separate development, the US and UK reached a trade deal on May 8, lowering auto tariffs and eliminating steel duties, though unresolved issues remain around pharmaceutical goods.
In Europe, inflation remained stable in April at 2.2%, according to Eurostat. Inflation rates across major economies showed slight declines, including Germany (2.2%), France (0.8%), and Cyprus (1.3%). The ECB is widely expected to lower rates further, with economists forecasting cuts in June and September that could bring the deposit rate to 1.75%. However, the recent US-China trade truce has tempered expectations, with markets now pricing in a slower pace of easing.
Geopolitical Events
Geopolitical focus shifted to diplomatic efforts in the Russia-Ukraine conflict. Ukrainian President Volodymyr Zelensky confirmed plans to meet Russian President Vladimir Putin in Turkey on May 15, pushing for a ceasefire agreement amid a backdrop of European pressure. However, uncertainty remained as the Kremlin had yet to confirm participation.
In the US, President Trump’s online criticisms of Fed policy continued, but markets appeared to shrug them off, focusing instead on tariff developments and macroeconomic data.
Market Trends
Equity markets rebounded sharply in May. The S&P 500 rose 6.6% over the past two weeks and turned positive for the year, fueled by optimism over the US-China tariff pause. European stocks followed suit, with Germany’s DAX up 6.3%, France’s CAC gaining 4.5%, and the STOXX Europe 600 rising 4.7%. In Asia, Hong Kong’s Hang Seng increased 5.1% and Japan’s Nikkei jumped 6.9%. While analysts welcomed the bounce, many cautioned that trade deals remain fragile and that economic fundamentals, including slowing growth and weaker corporate earnings, still pose risks.
Bond yields rose across the board as central banks signaled patience. The US 10-year Treasury yield climbed to 4.49%, while the 2-year yield rose to 4.02%. In Europe, German, French, and Italian yields also moved higher. Gold prices pulled back 1.2%, trading at $3,258 after hitting an all-time high in April, as investor risk appetite recovered.
Currency Trends
The US Dollar Index strengthened by 1.4% in May following the tariff truce. The euro weakened 1.6% against the dollar, now at $1.118. The dollar also gained against the Canadian dollar (+0.8%) and the Japanese yen (+2.7%), reflecting higher Treasury yields and improved risk sentiment. Sterling edged down 0.2%, trading at $1.329.
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