Tariff Quiet Shattered

For the week ending 23 May 2025

As of midday Friday, global equities were lower on the week as the White House, after a period of relative quiet on the trade front, renewed tariff threats. The yield on the US 10-year Treasury note rose 10 basis points on the week to 4.50%, having traded briefly above 4.60% at midweek on fiscal jitters. The price of a barrel of West Texas Intermediate crude oil fell $1 to $60.95. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), jumped to 23.5 from 19.35 last week.

MACRO NEWS

Liberation Day II: He’s coming for the EU

On Friday morning, US President Donald Trump threatened to impose 50% tariffs on imports from the European Union beginning June 1. Additionally, the president threatened to impose 25% tariffs on Apple if it doesn’t produce US-made iPhones for the US market. Risky asset prices sold off sharply after the early-morning social media posts. Earlier this week, the United States and European Union exchanged negotiating documents for the first time, outlining areas of discussion ranging from tariffs to digital trade and investment opportunities, according to the Financial Times. The EU proposal includes measures such as gradually reducing tariffs to zero on non-sensitive agricultural products and industrial goods, as well as mutual investments and strategic procurement in energy, artificial intelligence and digital connectivity. US Treasury Secretary Scott Bessent said Friday morning that he hopes the 50% tariff threat will “light a fire” under the EU and quicken the pace of talks. Most trading partners, with the exception of the EU, are negotiating in good faith, he said.

Long bond yields surge globally

A poorly received 20-year bond auction in Japan on Tuesday, followed by softer-than-usual demand for a bond of the same maturity in the US the next day, saw yields at the long end of global sovereign debt curves rise sharply at midweek, especially for countries with high debt burdens such as the US, Japan and the United Kingdom. In the US, prospects of easier fiscal policy at a time when the economy is at full employment are playing a role as tax and spending legislation works its way through Congress (see below). The US 30-year bond reached 5.15% early on Thursday, its highest level since 2007.

US House passes OBBB

The US House of Representatives narrowly passed the One Big Beautiful Bill Act by a vote of 215 to 214, extending the 2017 tax cuts and adding, among other measures, no tax on tips or overtime, a deduction for seniors drawing on Social Security, deductions for loans on US-made cars and raising the cap on the deductibility of state and local taxes, among other measures. If adopted as is by the Senate, the bill is forecast to add $2.5 trillion to the national deficit over 10 years. The bill is expected to add measurable fiscal stimulus over the next three years and contains many provisions that are slated to expire toward the end of Trump’s term. Those expiring provisions are intended to keep the price tag (in terms of projected deficits) on the package manageable. The Trump administration contends that a faster pace of economic growth will pay for the costs of the bill. The Senate is expected to take up the bill in early June.

Trump considers privatizing Fannie and Freddie

President Donald Trump said Wednesday that he was giving “very serious consideration to bringing Fannie Mae and Freddie Mac public. The companies, which play a key role in the market for mortgage-backed securities, have been under government conservatorship since the 2008 financial crisis. Fannie and Freddie have both long-since returned to profitability. The Wall Street Journal reported that bankers estimate that the government’s stake in the companies at over $250 billion.

QUICK HITS

The US Supreme Court found in favor of the Trump administration’s ouster of the heads of independent federal agencies but said the ruling will not apply to the Federal Reserve, which the court explicitly distinguished as uniquely structured and quasi-private. The ruling should quell fears that Trump could fire Fed Chair Jerome Powell, a frequent target of his ire.

The one area where the US remained exceptional in May was in showing strength in the purchasing managers’ indices. All three readings ticked up the preliminary May reading compared with final April data. 

The United Kingdom and European Union agreed on a pact that resets the post-Brexit relationship between the two sides. Areas covered include security, energy, travel and fisheries.

US Treasury Secretary Scott Bessent this week said that the US will impose previously threatened tariffs on trading partners that are not negotiating in good faith.

German business sentiment improved slightly in May with the Ifo index rising to 87.5 from 86.9 in April.

Stephen Miran, the head of the White House Council of Economic Advisers, said Thursday that the US maintains a strong dollar policy and that no secret talks on currencies are underway.

G7 finance ministers, meeting in Canada this week, issued a communique that agreed on the need for members to focus on correcting excessive imbalances while maintaining stable consumer prices. The group said it will consider further sanctions on Russia if no ceasefire emerges in Ukraine.

Japanese Prime Minister Shigeru Ishiba said he won’t compromise national interests in trade talks with the US and indicated he’s in no rush to reach an agreement.

Swiss National Bank President Martin Schlegel said this week that there is no alternative to US Treasuries, nor will there likely be one in the foreseeable future.

The Reserve Bank of Australia cut its policy rate by a quarter point to 3.85%, a two-year low. Bond yields fell after Governor Michele Bullock told reporters that the bank’s board had considered a half-point reduction.

The People’s Bank of China cut its benchmark lending rates for the first time since October on Tuesday. The one-year loan prime rate fell 0.1% to 3% and the five-year to 3.5%.

Iranian Supreme Leader Ali Hosseini Khamenei said nuclear talks with the US are unlikely to succeed. The comments came ahead of a fourth round of talks between the two sides this weekend in Rome. 

The Trump administration is considering issuing an executive order that would instruct agencies such as the departments of Labor, Treasury and the Securities and Exchange Commission to study the feasibility of opening 401(k) plans to private investments, the FT reported Wednesday.

UK CPI rose 3.5% year over year in April, exceeding expectations.

Bitcoin surpassed $111,000 for the first time on Thursday.

The US Treasury plans to halt the minting of new pennies by early next year. The coins cost far more to produce than their face value and resulted in a $85 million loss to the Treasury last year.

Canadian retail sales rose 0.8% in March from February.

Spurred by unusually warm weather, UK retail sales rose 5% in April.

THE WEEK AHEAD

Monday: US markets closed for Memorial Day; UK closed for Spring Bank Holiday

Tuesday: US durable goods orders; Case-Shiller Home Price Index; consumer confidence

Wednesday: EU ECB inflation expectations survey; US FOMC minutes; Nvidia reports earnings after the close

Thursday: US GDP revision

Friday: Japan retail sales; US PCE; Michigan sentiment; Canada GDP

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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.