Global Economy & Markets, Weekly Roundup 06/05/25
The pace of job creation in the US remains satisfactory, while the Federal Reserve is expected to keep interest rates steady
US equity markets remained in positive territory in the past week, supported by better-than-expected corporate profitability and a less cautious stance vis-à-vis tariff risks. The S&P500 earnings season continued on a positive note (actual EPS growth of +13% yoy so far versus expectations of +7% at the beginning of the season), with the S&P500 index up by +1.5% MtD (-3.9% YtD).
Government bond yields in the US increased, as labor market data came out stronger-than-expected, with non-farm payrolls up by 177k in April from 133k on average in the first quarter and the unemployment rate remaining at generally low levels (4.2%).
Specifically, US 10-Year yields have increased by 18 bps MtD to 4.35%, with 2-Year yields increasing by circa 20 bps as financial markets price-in a slower pace of policy rate cuts in the next twelve months (-75 bps to 3.75%). Having said that, the Fed is expected to maintain its policy stance unchanged at its May 7 meeting (rate at 4.25-4.50%), as it evaluates the total impact of policies by the Trump Administration.
In Q1:2025, US real GDP growth was marginally negative (-0.3% qoq annualized rate), following an outcome of +2.4% in Q4:2024, slightly below consensus expectations.
The GDP outcome has been distorted overall to the downside by a frontloading of goods imports ahead of increased tariff rates. Private consumption lost steam, consistent with the move higher in precautionary savings, increasing by +1.8% qoq annualized rate from +3.1%, on average, in the past four quarters.
Euro area equities have also increased month-to-date by +2.4% (+7.9% YtD) with the DAX40 index over-performing. However, on Tuesday, German equities came under selling pressures as CDU/CSU leader Merz initially failed to secure enough votes (at least 316) to be elected Chancellor, suggesting that lawmakers were not willing to give Mr. Merz a “carte blanche”.
Note that CDU/CSU (28.5% of the February 2025 vote and 208 seats) and SPD (16.4% and 120 seats) have signed a coalition deal on Monday. A second vote was held on Tuesday afternoon, with Mr. Merz finally securing the required majority with 325 votes.
Euro area real GDP came out better than expected in Q1:2025, up by +0.4% qoq (+1.2% year-over-year) versus consensus expectations of +0.2% qoq and from +0.2% qoq in Q4:2024. Nevertheless, the outcome was mainly led by Ireland (+3.2% qoq). Excluding Ireland, the annual change of euro area real GDP compared with the same quarter one year ago was +0.8%.
At the same time, euro area inflation remained broadly stable at +2.2% year-over-year in April, somewhat above consensus expectations (+2.1% yoy). Services inflation increased significantly to +3.9% yoy from +3.5% yoy in March, albeit seasonal distortions due to the different timing of Easter in 2025 may have contributed to the upside surprise.
All told, as underlying economic activity remains subdued and the disinflation process is on track, the ECB is expected to lower policy interest rates further in June (current Deposit Facility Rate: 2.25%).
US equity markets remained in positive territory in the past week, supported by better-than-expected corporate profitability and a less cautious stance vis-à-vis tariff risks. The S&P500 earnings season continued on a positive note (actual EPS growth of +13% yoy so far versus expectations of +7% at the beginning of the season), with the S&P500 index up by +1.5% MtD (-3.9% YtD).
Government bond yields in the US increased, as labor market data came out stronger-than-expected, with non-farm payrolls up by 177k in April from 133k on average in the first quarter and the unemployment rate remaining at generally low levels (4.2%).
Specifically, US 10-Year yields have increased by 18 bps MtD to 4.35%, with 2-Year yields increasing by circa 20 bps as financial markets price-in a slower pace of policy rate cuts in the next twelve months (-75 bps to 3.75%). Having said that, the Fed is expected to maintain its policy stance unchanged at its May 7 meeting (rate at 4.25-4.50%), as it evaluates the total impact of policies by the Trump Administration.
In Q1:2025, US real GDP growth was marginally negative (-0.3% qoq annualized rate), following an outcome of +2.4% in Q4:2024, slightly below consensus expectations.
The GDP outcome has been distorted overall to the downside by a frontloading of goods imports ahead of increased tariff rates. Private consumption lost steam, consistent with the move higher in precautionary savings, increasing by +1.8% qoq annualized rate from +3.1%, on average, in the past four quarters.
Euro area equities have also increased month-to-date by +2.4% (+7.9% YtD) with the DAX40 index over-performing. However, on Tuesday, German equities came under selling pressures as CDU/CSU leader Merz initially failed to secure enough votes (at least 316) to be elected Chancellor, suggesting that lawmakers were not willing to give Mr. Merz a “carte blanche”.
Note that CDU/CSU (28.5% of the February 2025 vote and 208 seats) and SPD (16.4% and 120 seats) have signed a coalition deal on Monday. A second vote was held on Tuesday afternoon, with Mr. Merz finally securing the required majority with 325 votes.
Euro area real GDP came out better than expected in Q1:2025, up by +0.4% qoq (+1.2% year-over-year) versus consensus expectations of +0.2% qoq and from +0.2% qoq in Q4:2024. Nevertheless, the outcome was mainly led by Ireland (+3.2% qoq). Excluding Ireland, the annual change of euro area real GDP compared with the same quarter one year ago was +0.8%.
At the same time, euro area inflation remained broadly stable at +2.2% year-over-year in April, somewhat above consensus expectations (+2.1% yoy). Services inflation increased significantly to +3.9% yoy from +3.5% yoy in March, albeit seasonal distortions due to the different timing of Easter in 2025 may have contributed to the upside surprise.
All told, as underlying economic activity remains subdued and the disinflation process is on track, the ECB is expected to lower policy interest rates further in June (current Deposit Facility Rate: 2.25%).