Global Economy & Markets, Weekly Roundup 03/06/25
Markets extended their recovery in May, with equity index valuations at the top of their longer-term range
Global equity prices rose across the board, long-term rates eased slightly, and corporate bond spreads narrowed early in the past week, albeit caution prevailed in the last trading sessions as back and forth on tariffs, maintained trade uncertainty at elevated levels.
Specifically, President Trump announced on May 30th that the recently imposed 25% additional tariff on imports of steel and aluminum (c.1.5% of US imports), will double as of June 4th.
Treasury Secretary Bessent pointed to trade negotiations with China being “a bit stalled”. Moreover, the US President and Chinese officials have exchanged accusations of breaches in bilateral trade arrangements, overall suggesting that respective talks have become more bitter.
Regarding monetary policy, the Fed will take a cautious approach regarding interest rate decisions until the net effects of the collective changes to US government policies become clearer, despite inflation easing further in April.
Indeed, the personal consumption expenditures index (PCE), the Fed’s preferred metric to gauge consumer inflation, decelerated to +2.1% yoy -- a seven month low -- from +2.3% yoy in March. The core PCE index also slowed to +2.5% yoy from +2.7% yoy. Market implied expectations, according to Federal Funds Rate futures pricing, point to cumulative rate cuts of -50 bps in the second half of 2025 (current target rate: 4.25% - 4.50%).
In this challenging economic environment, the OECD revised downwards global real GDP growth projections for 2025 and 2026 by -0.2 pps and -0.1 pp, respectively, to 2.9% from 3.3% in 2024.
Attention turns to the ECB meeting, due on June 5th. An interest rate cut by 25 bps to +2.0% appears all but a done deal as lower energy prices and an appreciating exchange rate since the last projections in March, amid subdued economic prospects, point to lower inflation estimates close to or slightly below the 2.0% target for 2025-2026.
Note that the euro area CPI inflation decelerated to +1.9% yoy in May from +2.2% yoy in April and below consensus estimates of +2.0%. The core CPI index slowed by -0.4 pps to +2.3% yoy due to the services subcomponent easing sharply by -0.8 pps to +3.2% yoy.
Attention will also turn to the forward guidance, combined with President Lagarde’s Press conference. The ECB will most likely maintain its data-dependent and meeting-by-meeting approach, due to the current environment of elevated trade policy uncertainty.
Looking forward, policy rates are approaching the neutral territory, with Philip Lane stating that rates in the high 2s are clearly restrictive and below 1.50% are clearly accommodative. Financial markets, according to overnight index swaps, are leaning towards the rate cutting cycle concluding with the DFR at 1.75%
On euro area real GDP growth, ECB March’s forecasts of +0.9% in 2025, followed by +1.2% in 2026 and +1.3% in 2027, appear roughly on track, albeit with a rebalancing of risks toward the downside. The OECD maintained euro area GDP forecasts for 2025 and 2026 at +1.0% and +1.2%, respectively.
Global equity prices rose across the board, long-term rates eased slightly, and corporate bond spreads narrowed early in the past week, albeit caution prevailed in the last trading sessions as back and forth on tariffs, maintained trade uncertainty at elevated levels.
Specifically, President Trump announced on May 30th that the recently imposed 25% additional tariff on imports of steel and aluminum (c.1.5% of US imports), will double as of June 4th.
Treasury Secretary Bessent pointed to trade negotiations with China being “a bit stalled”. Moreover, the US President and Chinese officials have exchanged accusations of breaches in bilateral trade arrangements, overall suggesting that respective talks have become more bitter.
Regarding monetary policy, the Fed will take a cautious approach regarding interest rate decisions until the net effects of the collective changes to US government policies become clearer, despite inflation easing further in April.
Indeed, the personal consumption expenditures index (PCE), the Fed’s preferred metric to gauge consumer inflation, decelerated to +2.1% yoy -- a seven month low -- from +2.3% yoy in March. The core PCE index also slowed to +2.5% yoy from +2.7% yoy. Market implied expectations, according to Federal Funds Rate futures pricing, point to cumulative rate cuts of -50 bps in the second half of 2025 (current target rate: 4.25% - 4.50%).
In this challenging economic environment, the OECD revised downwards global real GDP growth projections for 2025 and 2026 by -0.2 pps and -0.1 pp, respectively, to 2.9% from 3.3% in 2024.
Attention turns to the ECB meeting, due on June 5th. An interest rate cut by 25 bps to +2.0% appears all but a done deal as lower energy prices and an appreciating exchange rate since the last projections in March, amid subdued economic prospects, point to lower inflation estimates close to or slightly below the 2.0% target for 2025-2026.
Note that the euro area CPI inflation decelerated to +1.9% yoy in May from +2.2% yoy in April and below consensus estimates of +2.0%. The core CPI index slowed by -0.4 pps to +2.3% yoy due to the services subcomponent easing sharply by -0.8 pps to +3.2% yoy.
Attention will also turn to the forward guidance, combined with President Lagarde’s Press conference. The ECB will most likely maintain its data-dependent and meeting-by-meeting approach, due to the current environment of elevated trade policy uncertainty.
Looking forward, policy rates are approaching the neutral territory, with Philip Lane stating that rates in the high 2s are clearly restrictive and below 1.50% are clearly accommodative. Financial markets, according to overnight index swaps, are leaning towards the rate cutting cycle concluding with the DFR at 1.75%
On euro area real GDP growth, ECB March’s forecasts of +0.9% in 2025, followed by +1.2% in 2026 and +1.3% in 2027, appear roughly on track, albeit with a rebalancing of risks toward the downside. The OECD maintained euro area GDP forecasts for 2025 and 2026 at +1.0% and +1.2%, respectively.