Week #20 — Market Update for May 12-16, 2025

Igor Rotor, CFA

Chief Investment Officer at Atrani Capital

Published May 17, 2025

Executive Summary

The major U.S. stock indices surged between 3.4% and 7.2% for the week, driven by optimism around easing U.S.-China trade tensions. Unexpectedly strong progress in negotiations last weekend caught short sellers by surprise, triggering widespread share buybacks and pushing markets higher. This swift turnaround in sentiment prompted strategists to raise S&P 500 targets just weeks after downward revisions.

Tech behemoths led the rally, with the Magnificent 7 market cap gaining 8.7%. Notably, Nvidia surged 16.1%, surpassing a $3 trillion valuation, boosted by landmark deals expanding access to Middle Eastern markets. Nvidia will supply Saudi Arabia’s state-backed AI firm Humain with hundreds of thousands of advanced GB300 Grace Blackwell processors over five years, following relaxed U.S. export restrictions. Tesla shares climbed 17.3% amid optimism surrounding its upcoming robotaxi launch in Austin, Texas, potentially unlocking significant revenue. Investor confidence was further supported by news that Tesla’s board is exploring a revised compensation package for CEO Elon Musk, emphasizing his central role and reducing near-term leadership uncertainty.

However, potential headwinds remain. The rapid rebound over the past month has brought markets close to overheating, with the 14-day Relative Strength Index reaching its highest level since early December. Morgan Stanley’s Lisa Shalett suggests this rally may be nearing exhaustion, pointing to decelerating revenue growth among the Magnificent 7, declining free-cash-flow yields, and escalating capital expenditure competition as factors limiting further upside. Shalett recommends shifting away from tech toward sectors positioned to benefit from deregulation, such as financials, energy, and healthcare.

The Q1 2025 earnings season is nearly complete, with Refinitiv reporting that 460 S&P 500 companies (92%) have reported. Of these, 76.1% exceeded estimates—above the long-term average (67.0%) but below the four-quarter average (77.0%).

Cryptocurrencies showed mixed movements despite the broader rally, with Bitcoin rising just 0.5%, possibly stabilizing after a 20% surge last month. However, investor interest remained robust, with spot Bitcoin ETFs attracting $608 million in inflows this week, according to Farside data.

Globally, country ETFs advanced in line with the U.S. market, lifting the global ex-U.S. equity index by 1.9%.

The probability of a Fed rate cut in June dropped to 8.3% from 17.2% the prior week, as improved trade conditions reduced the urgency for monetary easing. Markets now expect two rate cuts in 2025—in September and December—down from three cuts projected last week. In total, 46 basis points of easing are priced in for the year, compared to 61 previously.

U.S. Treasury yields moved higher, with the yield curve rising by an average of 5 basis points. According to Bloomberg, the 10-year yield increased by 10 basis points to 4.48%, while the 30-year yield rose 11 basis points to 4.94%.

For comprehensive insights and deeper context, please refer to the full article.

US Stock Market

The major U.S. stock indices surged from 3.4% to 7.2% over the week, driven by optimism around easing U.S.-China trade tensions. Unexpectedly strong progress in negotiations last weekend caught short sellers by surprise, forcing them to buy back shares and pushing the broad market higher. Such a swift turnaround in sentiment prompted strategists to raise S&P 500 targets just weeks after a flow of downward revisions.

The most pronounced rally was in tech behemoths, with the Magnificent 7 market cap rising by 8.7%. In this group, the shares of Nvidia and Tesla were particularly notable. NVDA jumped 16.1% this week, surpassing a $3 trillion valuation, driven by landmark deals expanding access to Middle Eastern markets. Notably, Nvidia will supply Saudi Arabia’s state-backed AI firm Humain with hundreds of thousands of advanced GB300 Grace Blackwell processors over five years, following eased U.S. export restrictions. Meanwhile, TSLA rallied 17.3% in anticipation of its robotaxi launch in Austin, Texas, next month, potentially unlocking significant new revenue streams. Additionally, investor confidence was bolstered by news of Tesla's board exploring a revised compensation package for CEO Elon Musk, highlighting his continued central role and reducing near-term leadership uncertainty.

Nevertheless, potential headwinds remain on the horizon. The rapid rebound over the past month has brought markets close to overheating, reflected by the 14-day relative strength index reaching its highest level since early December. Morgan Stanley’s Lisa Shalett also indicates that this rally may be nearing exhaustion, pointing to decelerating revenue growth among the Magnificent 7, declining free-cash-flow yields, and escalating capital expenditure competition as limiting factors for further upside. Shalett advises investors to consider shifting away from tech stocks toward sectors positioned to benefit from deregulation, notably financials, energy, and healthcare.

In terms of sector performance, all sectors showed positive momentum.

The Fear & Greed Index, which gauges market sentiment, rose to 71 from 62 a week ago, swiftly approaching ‘extreme greed' zone.

The SPY ETF has decisively broken above critical resistance levels, including the 38.2% Fibonacci retracement, the 100-day SMA, and notably, the 200-day SMA, significantly strengthening its bullish technical outlook. The RSI has risen notably from 57.25 to 69.26, now at the edge of overbought territory, reflecting strong bullish momentum but signaling a possible short-term pause or pullback as the price approaches psychological resistance around the 600 level. While this move indicates a substantial improvement in market sentiment and trend structure, traders should remain cautious given the extended RSI, as it suggests potential near-term consolidation or minor corrective action could soon follow.

The earnings season is nearing its end. According to Refinitiv, 460 companies in the S&P 500 Index have reported Q1 2025 earnings so far, representing 92% of the index (up from 90% the previous week). Of these, 76.1% have exceeded analysts’ expectations, up from 75.8% the prior week. While the current beat rate is well above the long-term average of 67.0%, it remains below the four-quarter average of 77.0%.

Earnings growth projections for the quarter have once again been revised upward. S&P 500 companies are now expected to post year-on-year earnings growth of 14.3%, or 16.3% excluding the Energy sector—an increase from last week’s estimates of 14.1% and 16.1%, respectively.

Looking ahead, seventeen S&P 500 companies are scheduled to report results during the week starting May 19. Among all stocks, the most eagerly anticipated earnings reports include:

Cryptocurrency Market

Despite the broad rally in risky assets, cryptocurrencies posted mixed movements, with Bitcoin rising by 0.5%. This could be a sign of stabilization after last month's strong rally, when this cryptotoken surged more than 20%. Concurrently, Farside data does not show waning investor interest, with another week of robust inflows into spot Bitcoin ETFs, reaching $608 million.

Global Markets

Globally, country ETFs showed positive dynamics, following the U.S. market, with the global ex-U.S. equity index increasing by 1.9%.

The ACWX ETF has extended its bullish move, reaching higher toward the upper boundary of its ascending channel. The RSI has further increased from 63.19 to 69.05, now touching the threshold of overbought territory, which underscores strong bullish momentum but also raises caution around potential short-term exhaustion or consolidation ahead. The ETF continues to benefit from solid technical support from all major rising SMAs—the 50-day, 100-day, and 200-day. While the immediate technical outlook remains strongly bullish, traders should stay alert for possible momentum moderation or a mild corrective pullback from the upper channel boundary.

Economic Indicators, Statistics and News

Several important macroeconomic indicators and economic news were published during the week:

Global

· The US and China significantly de-escalated trade tensions through a temporary agreement, mutually lowering tariffs and suspending non-tariff countermeasures. Tariffs on Chinese imports to the US, which previously surged to 145%, were reduced to 30%, while China's retaliatory tariffs on US goods fell from 125% to 10%. This move follows intensive negotiations in Geneva, with US Treasury Secretary Scott Bessent highlighting an intention to avoid generalized economic decoupling, instead focusing on strategic decoupling in sectors deemed critical to national security, such as semiconductors, medicine, and steel.

The tariff truce, set initially for 90 days, could be extended, depending on ongoing constructive dialogue. Despite these positive developments, analysts remain cautious about the long-term prospects. Market surveys anticipate that tariffs could remain elevated at around 30% well into late 2025, potentially reducing Chinese exports to the US by up to 70% over the medium term. Some analysts predict further tariff reductions to around 20% only if a comprehensive trade deal emerges. Nevertheless, tariffs introduced during President Trump's first term, averaging around 12%, are widely expected to remain in place to avoid political backlash from his supporters.

In parallel, China agreed to remove non-tariff barriers imposed since early April, notably lifting its ban on Boeing aircraft deliveries, offering relief to the US aviation industry. Despite these conciliatory gestures, Beijing issued a white paper indicating plans to bolster its capabilities to counteract sanctions, emphasizing that cooperation should replace pressure and threats in international trade discussions.

US President Trump expressed optimism about the potential for broader concessions from China, including the removal of additional regulatory barriers to US imports and foreign investments. Trump also indicated openness to personally engage with Chinese President Xi Jinping, underscoring the importance of maintaining strong bilateral relations.

Economically, the trade truce had immediate implications. Despite this agreement, analysts anticipate short-term disruptions for the US economy, particularly visible in employment and inflation figures expected in the coming months. EY Chief Economist Gregory Daco warns that the temporary truce will not completely avert a slowdown, as elevated uncertainty, reduced hiring, and weakened consumer spending remain pressing issues. Forecasts indicate a deceleration in US GDP growth from 2.5% in 2024 to between 0.5% and 1% in 2025, depending on the trajectory of negotiations. Goldman Sachs and JPMorgan upgraded their 2025 US growth forecasts, predicting expansion of around 1% and 0.6%, respectively, while Barclays revised its earlier recession prediction to forecast modest growth of 0.5% this year.

Meanwhile, recent developments between the US and EU suggest progress in breaking their trade deadlock. After months of stalled discussions, both sides exchanged detailed negotiating documents covering key issues such as tariffs, digital trade, and investment opportunities. While this signifies movement toward an agreement, significant differences persist. Sabine Weyand, the European Commission’s lead trade official, cautioned against rapid concessions and warned that certain US tariffs—especially in critical industries like steel and automobiles—would likely remain in effect due to America's reshoring objectives.

US

· In a landmark decision underscoring mounting concerns over fiscal sustainability, Moody's Ratings downgraded the U.S. sovereign credit rating from Aaa to Aa1, removing America’s last top-tier credit rating. This action aligns Moody's with earlier decisions by Fitch Ratings (2023) and S&P Global (2011), which similarly downgraded the U.S. due to burgeoning fiscal deficits and ballooning national debt levels. Moody’s explicitly cited sustained budget deficits, elevated government debt, and rising interest payments—now reaching levels significantly above those of similarly rated sovereigns—as principal reasons behind their decision. The agency forecasts federal deficits expanding markedly, reaching nearly 9% of GDP by 2035 from the current level of around 6.4% of GDP.

This downgrade arrives amid contentious fiscal debates in Washington. Congressional Republicans have been pushing forward a major tax-and-spending bill designed to extend provisions from the 2017 Tax Cuts and Jobs Act and introduce further tax relief. Analysts estimate this proposed legislation could add approximately $3.3 trillion to the national debt, elevating the annual budget deficit beyond 7% of GDP by 2034. The Joint Committee on Taxation pegged the legislation's potential fiscal impact at $3.8 trillion over the next decade, though independent forecasts indicate significantly higher figures if temporary provisions are extended indefinitely.

The market reaction to Moody's announcement was immediate: an ETF tracking the S&P 500 declined by 1% in post-market trading, Treasury yields rose notably with the 10-year yield reaching as high as 4.49%, and significant concern arose among investors and portfolio managers regarding the potential erosion of Treasuries' status as a global safe haven. Market professionals express varying views, from caution that rising yields might trigger substantial equity profit-taking to confidence that global investors' appetite for U.S. assets, underpinned by the dollar’s reserve currency status, will remain resilient.

Notably, Moody's decision also attracted a sharply political response from the Trump administration, characterizing the downgrade as politically motivated and economically unjustified. The administration strongly defended its economic policies—highlighting tax cuts, deregulation, and protectionist trade measures—as catalysts for robust economic growth and productivity. However, Moody’s remains skeptical, pointing to a decade-long pattern of escalating debt and insufficient revenue generation as evidence of deteriorating fiscal metrics, compounded further by recent hikes in interest rates, which have significantly increased debt-servicing costs. Indeed, interest payments on U.S. federal debt surged to approximately $1.13 trillion in 2024, marking their highest level in decades.

Meanwhile, the broader economic implications and the potential long-term impact on investor sentiment remain points of debate. While many strategists assert that Moody's downgrade offers no fundamentally new information—since fiscal deterioration and high debt-to-GDP ratios have been widely recognized—others caution it serves as a significant psychological and symbolic signal. It may reinforce concerns about U.S. fiscal health among international investors, potentially influencing long-term capital flows. Furthermore, analysts highlight that the current fiscal trajectory could push debt levels beyond historical records set after World War II, with federal debt expected to surpass 107% of GDP by 2029, intensifying worries about sustainability.

Despite the downgrade, immediate global market panic remains unlikely, given the entrenched position of U.S. Treasuries as a cornerstone investment for international portfolios—foreign holdings of U.S. debt have, in fact, continued to increase, recently exceeding $9 trillion. Still, financial experts express unease over complacency regarding fiscal deficits and warn of the dangers inherent in maintaining such unprecedented peacetime deficit spending, potentially leading to scenarios described as "debt bombs," where borrowing to service existing debt could spiral out of control.

· Recent U.S. inflation data offered reassuring signals for markets, alleviating fears that elevated tariffs would trigger rapid price increases. The consumer price index (CPI) rose 0.2% month-over-month in April, below forecasts of a 0.3% gain, marking the third consecutive month inflation has moderated more than anticipated. On an annual basis, headline CPI advanced 2.3%, slightly undershooting market estimates, while core CPI (excluding volatile food and energy costs) climbed 2.8%, aligning with expectations. Importantly, core goods categories most exposed to tariff pressures—such as apparel and autos—showed surprisingly muted inflation, suggesting that importers and retailers continue absorbing much of the higher trade-related costs rather than passing them on fully to consumers.

Core services inflation—the dominant component in the CPI basket—continues its gradual moderation, though shelter costs edged up 0.3% month-over-month. This increase underscores persistent pressure from rents and housing costs, critical areas for the Fed’s inflation assessment. Nevertheless, services inflation excluding housing and energy slowed to 2.7% year-over-year, its weakest growth rate in four years, providing some relief to policymakers. Bloomberg Economics notes that disinflation in service sectors has effectively balanced out tariff-driven price pressures in goods, creating a temporary "sweet spot" for overall inflation trends.

Market observers, including Bloomberg’s John Authers, describe April’s CPI data as "comfortingly dull," signaling market expectations around inflation may be stabilizing. However, he highlights persistent challenges within certain categories: while gasoline and television prices fell, coffee, cigarettes, textbooks, and heating gas remain elevated, underlining uneven inflation dynamics across different sectors. Authers also notes improvements across advanced inflation measures closely watched by the Fed, including the "supercore" services index excluding shelter, which fell to 2.7%, its lowest since 2021.

Meanwhile, producer prices (PPI) unexpectedly decreased in April by 0.5%, marking the largest monthly decline in five years. Excluding food, energy, and trade services, core PPI fell by 0.1%, also the first decline recorded in five years. This surprising drop highlights how U.S. companies continue absorbing increased tariff burdens, leading to compressed margins rather than significant price hikes for end consumers. Particularly notable was a significant contraction in service-sector margins—down 0.7%—the sharpest drop recorded since 2009. Companies appear reluctant to pass these additional costs onto consumers amidst weakening consumer sentiment and tepid retail sales figures, as businesses attempt to sustain demand levels.

· U.S. retail sales growth slowed significantly in April, increasing only 0.1% month-over-month, down sharply from a robust 1.7% rise in March. Spending declines were most notable in cars, sporting goods, gasoline, and apparel—all heavily reliant on imported goods and vulnerable to higher trade tariffs. The control group measure, which informs GDP calculations and excludes volatile categories like autos and gasoline, contracted 0.2%, signaling potential headwinds for economic growth in the second quarter. Economists from Pantheon Macroeconomics suggest that retail momentum may weaken further in May and June as tariff-related stockpiling by consumers fades and cost increases gradually filter through to prices.

Parallel to weakening spending, consumer sentiment as measured by the University of Michigan plunged unexpectedly to 50.8 in May, the second-lowest level on record, underscoring broad-based anxiety over tariffs. Nearly three-fourths of survey participants cited tariffs spontaneously, reflecting persistent fears despite the recent US-China agreement to temporarily reduce tariff levels. Inflation expectations surged dramatically, with consumers anticipating price increases of 7.3% over the next year—the highest since 1981—and 4.6% annually over the coming five to ten years, the highest since 1991. Current personal finance evaluations dropped to the lowest levels since 2009, accompanied by historically low financial expectations, reinforcing the negative outlook among US consumers.

The LSEG/Ipsos Primary Consumer Sentiment Index echoed these troubling trends, declining for a third consecutive month to a reading of 50.0 in May. This represents a year-over-year drop exceeding four points, driven by pronounced weakening in current job market perceptions and reduced purchasing comfort. The Current and Investment sub-indices each fell roughly four points, suggesting deteriorating confidence in present economic conditions. The Expectations and Jobs sub-indices also experienced notable declines, with the Jobs index down nearly seven points compared to last year, underscoring diminished employment optimism. Correspondingly, analysts polled by LSEG have revised earnings estimates downward, predicting retail and restaurant earnings growth will slow sharply from 7.5% in Q1 to -0.9% in Q2—the sector’s first projected negative performance since the pandemic, clearly reflecting anticipated declines in consumer spending.

Further confirming the softening economic landscape, US factory production contracted by 0.4% in April, marking the first decline in half a year and reversing a previous upward trend. The manufacturing pullback was broad-based, with notable reductions in motor vehicles, apparel, computers, and consumer electronics—industries directly impacted by import tariffs. While business equipment output managed a marginal increase, broader industrial production stagnated, underscored by lower capacity utilization at factories, now down to 76.8%.

Eurozone

· The euro-area economy grew more slowly than initially reported in the first quarter of 2025, expanding by just 0.3% quarter-on-quarter, down from an earlier estimate of 0.4%. This downward revision comes despite initial optimism and still exceeded economists' original forecasts at the time of the initial release. While the overall economic growth moderated, the labor market remained resilient, with employment growth accelerating to 0.3%, compared to just 0.1% in the previous quarter.

Asia

· Japan's economy contracted significantly in the first quarter of 2025, declining by an annualized 0.7%, markedly worse than economists' predictions of a 0.3% contraction. The sharp downturn was primarily driven by deteriorating trade figures, with exports falling 0.6% and imports surging 2.9%, weighing heavily on net trade. Private consumption remained stagnant, offering no meaningful support as consumers faced heightened inflationary pressures eroding their purchasing power. Business spending emerged as one of the few positives, rising 1.4% on a quarterly basis, yet analysts caution that sustaining this pace will be challenging amid growing uncertainties.

The economic contraction occurred even before the full impact of heightened US tariffs materialized, intensifying concerns that Japan may slip into a technical recession in the second quarter. These worries are compounded by the US administration's broader tariff regime, including a 25% duty on steel, aluminum, and automobiles, as well as a universal 10% tariff on Japanese goods set to increase to 24% absent a bilateral trade deal. Trade negotiations between the US and Japan have shown little progress, with significant differences over agriculture and automotive sectors causing Tokyo to adopt a cautious stance, prioritizing domestic interests and political considerations ahead of the upcoming upper house elections.

· India's inflation rate continued to moderate in April, creating further room for the Reserve Bank of India (RBI) to maintain its accommodative monetary stance to stimulate growth in Asia's third-largest economy. Consumer prices rose by 3.16% year-on-year, marking the slowest increase since July 2019 and undershooting economists' forecast of 3.2%. This reading follows March's inflation figure of 3.34% and remains comfortably below the RBI's medium-term target of 4%.

The easing of inflation primarily reflects a significant reduction in food prices, which constitute roughly half of the CPI. Specifically, food inflation slowed to 1.78% from 2.69% in March. Within the food segment, vegetable prices notably contracted by 10.98%, following a 7.04% decline in March, while pulses also recorded a price contraction of 5.23%.

This moderation in inflation, combined with stable global oil prices and favorable monsoon forecasts, provides the RBI substantial leeway to prioritize economic growth at its upcoming monetary policy review in June. India's weather department predicts above-average monsoon rains this year, further supporting expectations of robust agricultural output, which would likely keep food inflation subdued.

Foreign Exchange Markets

The U.S. Dollar Index, which tracks the greenback against a basket of major currencies, rose by 0.8% over the past week.

Commodities and Energy Markets

The commodities sector ended the week mostly higher, with positive performance across most major assets.

Debt and Fixed Income Markets

Market Movements

According to CME data, the implied Fed Funds rate curve for the next 18 months (ending in October 2026) moved higher by an average of 12 basis points, with the terminal rate now projected to be 15 basis points higher.

The probability of a rate cut in June declined to 8.3%, down from 17.2% the previous week, as positive trade developments reduced the necessity of immediate monetary support. Looking ahead, markets are now pricing in two rate cuts expected in 2025—in September and December—compared to three in July, October, and December the previous week. In total, 46 basis points of easing are priced in for the year, down from 61 basis points.

Similarly, the U.S. Treasury yield curve also shifted upward by an average of 5 basis points. According to Bloomberg, the 10-year Treasury yield increased by 10 basis points to 4.48%, while the 30-year yield rose by 11 basis points to 4.94%.

Central Bank Insights

· Recent monetary policy discussions within the Bank of Japan reflect ongoing caution amid persistent economic uncertainties driven largely by US tariff measures. During the BOJ’s policy meeting on April 30-May 1, members reaffirmed their general stance toward continuing interest rate hikes, highlighting sustained above-target inflation, which has remained around or above the BOJ’s 2% goal for approximately three years. Nonetheless, policymakers acknowledged significant risks arising from trade developments, particularly regarding the recently escalated US tariffs, notably the introduction of a 25% levy on automobiles—a crucial sector for Japanese exports. As a result, the central bank pushed its timeline for achieving stable inflation further out by one year and significantly lowered its GDP growth forecast for fiscal 2025.

One BOJ board member explicitly noted that the future trajectory of US tariff policies and corresponding corporate responses remain highly uncertain, suggesting that current economic forecasts could undergo considerable revisions. Another policymaker emphasized the necessity for flexibility in monetary policy given the potential for rapid changes in global trade dynamics. Reflecting these concerns, Goldman Sachs and Barclays recently adjusted their expectations, pushing projected timing for the next BOJ rate hike into late 2025 or potentially 2026. However, easing tensions from a recent US-China trade deal prompted some analysts to reconsider earlier rate hike forecasts, with markets now pricing a roughly 63% probability of an increase from the current 0.5% policy rate within this calendar year, an increase from 52% the previous week.

Despite prevailing sentiment among most BOJ policymakers favoring eventual monetary tightening, the most dovish board member, Toyoaki Nakamura, strongly cautioned against premature rate hikes. Nakamura, who consistently opposed Governor Kazuo Ueda's three rate increases since March 2024, stressed that the current environment—marked by weaker-than-expected first-quarter economic data showing Japan’s GDP contracting sharply—demands deliberate and data-driven policy decisions. Nakamura underscored risks to consumer spending and investment from tightening monetary policy during a slowdown, especially given persistently weak real wage growth, which improved in only four months over the past three years.

· Over the past week, Bank of England Monetary Policy Committee (MPC) members have expressed differing perspectives on the appropriate direction for interest rates, reflecting deepening concerns about growth, inflation, and the UK’s economic resilience.

Alan Taylor, a notably dovish voice, emphasized significant downside risks stemming from the ongoing trade tensions, stating explicitly that interest rates remain "a long way" from exiting restrictive territory. Taylor, who advocated strongly for a substantial 50-basis-point rate cut at the recent MPC meeting, views the UK's neutral rate—where policy is neither stimulative nor restrictive—as between 2.75% and 3%, a benchmark critical to assessing monetary policy stance. His concerns focus primarily on the disinflationary implications of trade disruptions, particularly the diversion of goods originally destined for the US, alongside moderating wage pressures that align with recent BOE forecasts.

Deputy Governor Clare Lombardelli adopted a more cautious tone, noting persistent inflationary pressures from services and wages, which she described as "not entirely reassuring." Lombardelli acknowledged she had been balanced between maintaining current rates and supporting a rate reduction, ultimately voting for a cut to provide economic "insurance" against downside shocks from trade disruptions. Megan Greene echoed these cautious sentiments, expressing uncertainty between holding or easing rates and highlighting that, despite indications of moderation, underlying inflation pressures remain concerning.

The MPC’s internal divisions—its most pronounced since February 2024—underscore the challenges facing policymakers as inflation pressures intersect with deteriorating growth prospects. Notably, Catherine Mann shifted her previous stance, opting to pause rather than support a significant rate cut, citing recent market developments that effectively delivered an easing of financial conditions equivalent to around 75 basis points, more than the 50 basis points initially sought. Mann argued that incremental 25-basis-point adjustments become ineffective amid heightened market volatility and emphasized a preference for larger, decisive policy actions. However, she stressed that further easing would require clear evidence of firms losing pricing power and becoming more moderate in their pricing strategies, particularly amid ongoing margin pressures.

Separately, Deputy Governor Sarah Breeden highlighted structural vulnerabilities in UK financial markets, specifically within the gilt repo market. She announced forthcoming discussions aimed at strengthening market resilience following previous instability linked to the 2022 bond market turmoil triggered by then-Prime Minister Liz Truss’s fiscal policies.

· Recent monetary policy discussions among European Central Bank policymakers have centered around caution and flexibility in response to increased global uncertainty stemming from US trade policy under President Donald Trump. ECB Governing Council members have broadly indicated a preference for further rate cuts amid softening economic growth, with market expectations aligning around a reduction from the current deposit rate of 2.25% potentially to below 2% later this year.

ECB Chief Economist Philip Lane noted explicitly that heightened uncertainty about US tariff policies has prompted the inclusion of alternative economic scenarios in the ECB’s June macroeconomic projections. Lane emphasized this methodological shift as necessary, paralleling past crises such as the pandemic and the conflict in Ukraine. He dismissed the potential introduction of an ECB equivalent to the Fed’s "dot plot," suggesting such a move would create unrealistic market expectations.

Joachim Nagel highlighted considerable disruptions to financial markets following recent US tariff escalations, characterizing April’s market reaction as near "meltdown." Nagel urged caution and patience until the ECB’s June policy meeting, given ongoing trade uncertainties and their implications for European economic stability. Together with Spain’s Jose Luis Escriva, Nagel stressed that Trump’s policy unpredictability significantly complicates monetary policymaking, advocating a careful, data-dependent approach. Escriva further argued for agility, emphasizing the necessity of frequent assessments based on high-frequency economic indicators, given the unclear inflationary impact of trade policies.

Martins Kazaks similarly indicated support for cautious rate cuts, suggesting the ECB is nearing its terminal rate. Kazaks recognized persistent risks of a shallow recession following a weaker-than-initially-reported 0.3% GDP expansion in the euro area during Q1 2025. While signaling openness to additional gradual reductions, he stressed that significant uncertainty surrounding global trade conditions requires measured action.

Gabriel Makhlouf presented detailed scenario analysis highlighting diverse implications of the current tariff situation. He noted an initial ECB staff GDP forecast for 2025 of only 0.9%, which already reflected below-potential growth despite a more optimistic 1.2% year-on-year expansion in Q1, boosted by tariff-related frontloading of exports. Makhlouf articulated multiple potential outcomes, ranging from persistent uncertainty without major tariff escalation—likely disinflationary due to dampened demand and euro appreciation—to more severe scenarios involving permanent reciprocal tariffs, possibly leading to prolonged supply disruptions and conflicting pressures on inflation. Emphasizing caution, he suggested that monetary policy must remain agile and adaptive, given the risks posed by potential inflationary pressures from higher public spending and frequent supply-side shocks.

Isabel Schnabel, another influential ECB official, echoed the theme of maintaining a steady policy stance. While acknowledging short-term disinflationary effects from falling energy prices and global trade tensions, Schnabel emphasized medium-term inflation uncertainties, cautioning against premature policy easing. She highlighted recent euro appreciation as reflecting investor confidence rather than an intentional competitive devaluation, suggesting Europe should leverage current conditions to strengthen the euro's international standing, potentially via enhanced fiscal integration and common bond issuance.

France’s François Villeroy de Galhau provided clearer short-term guidance, explicitly stating that another rate cut is probable by summer, as US trade policies have not triggered significant inflationary pressures in Europe. He further dismissed concerns about a potential currency war, framing current euro-dollar movements as a natural market response to evolving economic outlooks rather than deliberate policy action.

Klaas Knot reiterated these perspectives, expressing concern over the short-term deflationary impacts of US trade uncertainty, highlighting cautious consumer behavior due to employment anxieties. Knot underscored the complexity of medium-term inflation outcomes, describing them as ambiguous and warranting close monitoring, particularly given recent volatility in currency markets, although he sees no immediate threat to dollar dominance.

Market analysts surveyed by Bloomberg now forecast ECB rate cuts to reach 1.75% by September, revising earlier expectations due to increased downside risks. They anticipate inflation undershooting the ECB’s 2% target by early 2026, projecting price growth at around 1.7%-1.8% during that period, down from previous forecasts of approximately 1.9%.

· Over the past week, senior Federal Reserve officials have extensively discussed the evolving monetary policy landscape amid heightened uncertainty stemming primarily from President Trump's trade policies. Fed Chair Jerome Powell underscored ongoing discussions about potential adjustments to the central bank’s policy framework, particularly revisiting its 2020 shift toward flexible average inflation targeting. Powell emphasized that the existing framework—designed during a prolonged period of low interest rates and subdued inflation—requires updating to reflect the current economic environment, including more frequent supply shocks and persistently elevated inflation. Although Powell reiterated the Fed's commitment to its 2% inflation target, he acknowledged the changing macroeconomic landscape and suggested a more robust, adaptable approach is necessary, particularly given that the zero lower bound no longer appears to be the default scenario.

Governor Adriana Kugler expressed concerns over the inflationary and growth-dampening effects of Trump administration tariffs, despite recent reductions in levies on China. She indicated tariffs remain historically high, representing a negative supply shock likely to depress productivity, investment, and consumer demand, ultimately raising inflationary pressures. Kugler anticipates that the Fed’s future policy path might require adjustments in magnitude but maintained her overall cautious stance, advocating close monitoring of economic developments.

Chicago Fed President Austan Goolsbee described tariffs as inherently "stagflationary," even though the temporary truce between the US and China has mitigated some of the adverse effects. Goolsbee highlighted that existing tariffs remain three to five times higher than earlier levels, creating persistent headwinds by simultaneously dampening growth and pushing prices upward. He emphasized the Fed's prudent wait-and-see approach, suggesting that premature actions amid policy uncertainty would be inappropriate. Goolsbee characterized current economic data as still relatively stable, though he cautioned that prolonged uncertainty has led businesses to postpone significant investment and hiring decisions.

Similarly, Fed Vice Chair Philip Jefferson acknowledged increased downside risks to growth and upside pressures on inflation from sustained tariffs. Jefferson revised down his own economic growth projections for this year, yet still expects moderate expansion. He stated clearly that while current monetary policy settings remain "moderately restrictive," the Fed retains flexibility to act promptly should conditions deteriorate more sharply.

San Francisco Fed President Mary Daly advocated patience given the robust underlying US economy, with solid labor market conditions, stable growth, and declining inflation. Although she labeled Trump’s trade policies as creating an "uncertainty shock," Daly noted this has not yet translated into a measurable decline in aggregate demand or employment. Nonetheless, she stressed that policymakers remain ready to respond flexibly if this uncertainty evolves into tangible economic disruptions.

Governor Michael Barr raised specific concerns about supply-chain disruptions caused by tariffs, highlighting vulnerabilities for small businesses with limited access to credit. Barr emphasized that prolonged supply-chain disruptions could replicate the pandemic’s negative impact, notably increasing inflation and suppressing output.

Finally, Atlanta Fed President Raphael Bostic projected modest economic growth between 0.5% and 1% for this year, explicitly noting ongoing tariff-related uncertainty as a drag on business decision-making and consumer confidence. He maintains a forecast of one interest rate cut in 2025, reflecting his cautious outlook, though he acknowledged the recent temporary US-China trade détente slightly mitigates immediate risks. Bostic warned explicitly that tariffs continue to exert upward pressure on inflation, indicating Fed policy will remain constrained and potentially biased toward counteracting these inflationary pressures over the coming months.