Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 26/05/25
The US fiscal trajectory has been a key focus as the tax bill heads to the Senate, with longer term Treasury yields near multi month highs
Realized volatility has increased in global markets in recent days, as (i) trade concerns were amplified on Friday 23rd and (ii) the US budget reconciliation bill contains spending cuts that fail to fully offset lower revenues due to the roll-over of TCJA (2017) tax cuts.
Although the bill will undergo modifications before being finalized, it will probably add to the deficit in the next ten years. Republicans aim at reaching an iteration which will secure the support of both chambers of the US Congress by the 4th of July. Note that the Federal Government primary budget deficit has averaged -3.5% of GDP in the past three years, relative to -2.1% in the past thirty.
The aforementioned fiscal challenges, as well as policy unpredictability have led US Treasury long-term bond yields higher. In the event, the 30-year yield increased by +14 bps wow to 5.04%, the highest since October 2023, briefly hitting 5.16% intra-week, the highest since July 2007. The US Dollar also took a hit, down by -2.0% wow in trade-weighted terms (DXY index, -5.7% year-over-year).
Elevated long-term US Treasury yields, fed through to nervousness in equity markets, with the S&P500 down by -2.6% wow amid elevated price-to-earnings ratio of 21.4x. US trade policy uncertainty re-entered the spotlight on Friday, further weighing on risk appetite, with the S&P500 down by -0.7% and the EuroStoxx shedding -1.5%.
President Trump announced his intention to impose as of June 1st a 50% tariff on imports of goods from the EU due to unsatisfactory progress in the bilateral trade talks, instead of 20% according to the “reciprocal” tariffs the US announced on April 2nd (largely on hold up to early-July).
However, on Sunday, Mr. Trump stated that the implementation of the 50% levy is postponed for July 9th, to allow for more talks with the European Union to take place. Equity markets welcomed that development, with the EuroStoxx appearing poised for c. +1% gains on Monday May 26th as concerns regarding a sharp economic slowdown in the euro area receded.
Nevertheless, international trade uncertainties, among other factors, has prompted an estimated delay in the anticipated recovery of economic activity in the euro area. According to recent estimates from the European Commission, real GDP is set to be stagnant in Q2:2025 (+0.3% qoq in Q1:2025), followed by +0.1% qoq in Q3:2025, +0.3% qoq in Q4:2025 and +0.4% qoq throughout 2026. Business leading indicators (PMIs) corroborated the view for a subdued economic momentum, with the composite index declining by -0.9 pts to 49.5 in May, a 5-month low.
China’s Authorities continue to take gradual steps to support economic activity as higher tariffs from the US and uncertainty regarding international trade conditions, weigh on growth estimates for 2025. The focus recently has mainly been on partly facilitating lending to the real economy.
In the event, the People’s Bank of China (PBoC) reduced by -10 bps the 1-year Loan Prime Rate (a benchmark for interest rate setting by commercial banks for most corporate and short-term household loans) to 3.0% and its 5-year peer (a benchmark for mortgage loans) to 3.5%. More credit-friendly policies by Authorities have led overall credit annual growth, as measured by Aggregate Financing to the Real Economy, to +8.7% in April from a trough of +7.8% in November 2024.
Realized volatility has increased in global markets in recent days, as (i) trade concerns were amplified on Friday 23rd and (ii) the US budget reconciliation bill contains spending cuts that fail to fully offset lower revenues due to the roll-over of TCJA (2017) tax cuts.
Although the bill will undergo modifications before being finalized, it will probably add to the deficit in the next ten years. Republicans aim at reaching an iteration which will secure the support of both chambers of the US Congress by the 4th of July. Note that the Federal Government primary budget deficit has averaged -3.5% of GDP in the past three years, relative to -2.1% in the past thirty.
The aforementioned fiscal challenges, as well as policy unpredictability have led US Treasury long-term bond yields higher. In the event, the 30-year yield increased by +14 bps wow to 5.04%, the highest since October 2023, briefly hitting 5.16% intra-week, the highest since July 2007. The US Dollar also took a hit, down by -2.0% wow in trade-weighted terms (DXY index, -5.7% year-over-year).
Elevated long-term US Treasury yields, fed through to nervousness in equity markets, with the S&P500 down by -2.6% wow amid elevated price-to-earnings ratio of 21.4x. US trade policy uncertainty re-entered the spotlight on Friday, further weighing on risk appetite, with the S&P500 down by -0.7% and the EuroStoxx shedding -1.5%.
President Trump announced his intention to impose as of June 1st a 50% tariff on imports of goods from the EU due to unsatisfactory progress in the bilateral trade talks, instead of 20% according to the “reciprocal” tariffs the US announced on April 2nd (largely on hold up to early-July).
However, on Sunday, Mr. Trump stated that the implementation of the 50% levy is postponed for July 9th, to allow for more talks with the European Union to take place. Equity markets welcomed that development, with the EuroStoxx appearing poised for c. +1% gains on Monday May 26th as concerns regarding a sharp economic slowdown in the euro area receded.
Nevertheless, international trade uncertainties, among other factors, has prompted an estimated delay in the anticipated recovery of economic activity in the euro area. According to recent estimates from the European Commission, real GDP is set to be stagnant in Q2:2025 (+0.3% qoq in Q1:2025), followed by +0.1% qoq in Q3:2025, +0.3% qoq in Q4:2025 and +0.4% qoq throughout 2026. Business leading indicators (PMIs) corroborated the view for a subdued economic momentum, with the composite index declining by -0.9 pts to 49.5 in May, a 5-month low.
China’s Authorities continue to take gradual steps to support economic activity as higher tariffs from the US and uncertainty regarding international trade conditions, weigh on growth estimates for 2025. The focus recently has mainly been on partly facilitating lending to the real economy.
In the event, the People’s Bank of China (PBoC) reduced by -10 bps the 1-year Loan Prime Rate (a benchmark for interest rate setting by commercial banks for most corporate and short-term household loans) to 3.0% and its 5-year peer (a benchmark for mortgage loans) to 3.5%. More credit-friendly policies by Authorities have led overall credit annual growth, as measured by Aggregate Financing to the Real Economy, to +8.7% in April from a trough of +7.8% in November 2024.