US Economy: Weekly Commentary – May 19, 2025.
US Market Review
Treasury yields rose again amid structural concerns. Equities rallied, led by tech. The dollar strengthened, oil climbed, gold fell, and Bitcoin remained above $100,000.

Treasury yields increased for the third consecutive week, with the 10-year surpassing 4.5%—a level last seen during the Trump administration’s tariff adjustments. While headline inflation concerns have eased, rate cut expectations for 2025 have been halved to two. Investors are demanding higher compensation for long-term debt due to structural factors such as sustained fiscal deficits, rapid Treasury issuance, and reduced foreign demand, driving the term premium out of negative territory. This suggests that neither inflation control—still uncertain given rising expectations—nor rate cut speculation can anchor long-term yields. Meanwhile, Moody’s downgraded the US credit rating from Aaa to Aa1, citing increased debt and interest burden, resulting in the loss of the nation’s last top-tier AAA rating.

U.S. equities had a strong week across the board. Microcaps led the rally, gaining 5.65%, followed by large caps (+5.30%) and small caps (+4.50%). The "Magnificent 7" surged 9.50%, driven by standout performances from NVIDIA (+11%) and Tesla (+8%). All sectors posted gains, with technology and consumer discretionary once again leading the way—both rising more than 7.5%.

The U.S. dollar strengthened for the fourth week in a row, appreciating 0.83% against the euro, buoyed by lingering inflation concerns. WTI crude advanced 2.33% as U.S.-China trade tensions eased, although gains were capped by expectations of increased supply from Iran and OPEC+. Gold suffered its worst weekly loss since the election, down 3.17%. Meanwhile, Bitcoin held steady above $100,000.
US Market Views Synopsis
Inflation moderated in April while core remained steady; housing weakened due to high costs, and consumer sentiment stayed low amid rising expectations and persistent tariff concerns.

U.S. economic data for April and May paints a picture of persistent inflation concerns, housing market weakness, and subdued consumer sentiment. Inflation eased more than expected, with headline CPI rising 0.2% month-over-month and annual inflation falling to 2.3%, the lowest since February 2021. Easing shelter costs and fading tariff pressures contributed to this moderation, though year-ahead inflation expectations rose sharply to 7.3%. The housing market continued to struggle amid high mortgage rates, labour shortages, and elevated construction costs, with permits and single-family starts both declining. Builder sentiment dropped to its lowest level since December 2022, and price cuts became more common. Consumer sentiment remained weak, down nearly 30% since January 2025, with tariffs spontaneously mentioned by 75% of respondents. Temporary tariff pauses had limited impact on sentiment, and political uncertainty continues to weigh on consumer expectations. Despite recent improvements in data, inflationary pressures and weak housing activity suggest a cautious outlook for the economy.
Inflation
US inflation eased in April, with lower shelter costs and fading tariff pressures, easing Fed concerns and supporting potential rate cuts later this year.

US inflation moderated more than anticipated in April, with headline CPI rising 0.2% month-on-month—below the expected 0.3%—bringing the annual rate down to 2.3%, the lowest since February 2021, while core inflation (excluding food and energy) remained unchanged at 2.8%, in line with forecasts. This suggests that tariffs have not yet significantly impacted consumer prices or pushed inflation higher. The slowdown reflects easing shelter cost increases, which account for over a third of the inflation basket, alongside declining prices in sectors such as airline fares (-2.8% MoM), used cars (-0.5%), apparel (-0.2%), and food (-0.1%), partially offset by increases in medical care services (+0.5%) and vehicle maintenance (+0.7%). Importantly, leading indicators like the Cleveland Fed’s new tenant rent series suggest a significant deceleration in shelter inflation is expected later this year. Furthermore, the diminishing tariff threat—especially following recent trade agreements with China—reduces upward price pressures on commodities, which constitute less than 20% of the inflation basket, excluding food and energy. Supporting this trend, the NFIB survey of small businesses shows a decline in firms raising or planning to raise prices, signalling softer services inflation. Collectively, these factors ease inflationary concerns for the Federal Reserve, maintaining the possibility of interest rate cuts in the coming months while supporting a more favourable outlook for economic growth.

We expect higher inflation ahead due to tariffs reimposed by Trump, despite recent reductions, and anticipate no rate cuts from the Federal Reserve, as bond yields continue to reflect this tightening outlook.
Housing market
April housing data shows declining permits and weak single-family activity, driven by high costs, rising mortgage rates, labour shortages, and worsening builder sentiment despite modest relief measures.

U.S. housing data revealed mixed trends in the residential construction sector, pointing to a cautious outlook. Building permits—an early indicator of future construction—fell 4.7% to an annualised rate of 1.412 million, missing expectations of 1.45 million. This decline signals a potential slowdown in upcoming single-family homebuilding, driven by elevated inventory levels in key markets and persistent affordability challenges. Housing starts rose 1.6% month-over-month to 1.361 million, just under the forecasted 1.364 million, rebounding from a previously revised 10.1% drop in March. However, single-family housing starts declined by 2% from March and are down 12% year-over-year, while single-family permits dropped 5% and completions fell 8%, underscoring a broader deceleration in new home supply. Rising mortgage rates in April added pressure by increasing financing costs for both builders and buyers, while residential construction costs remain more than 40% above pre-pandemic levels. Compounding the issue, builders continue to face skilled labour shortages and ongoing uncertainty around material pricing, with 78% of them reporting recent difficulty in setting home prices. Builder sentiment deteriorated sharply in May, falling to its lowest level since December 2022—a level last seen in November 2023—reflecting broad-based pessimism about current and future sales, buyer traffic, and overall market conditions. Though a temporary 90-day agreement between the United States and China to reduce tariffs may offer modest relief on input costs, consumer confidence remains fragile, and current buyer incentives such as mortgage rate buydowns may not be enough to spur activity. In response to these headwinds, 34% of builders reported cutting home prices in May, up from 29% in April and marking the highest share since December 2023.

We expect the residential construction sector to remain weak, with no meaningful recovery likely until late in the year. Persistent affordability issues, elevated construction costs, and tight credit conditions will continue to weigh on both supply and demand.
Consumer Sentiment
Consumer sentiment remained low, with inflation expectations rising sharply and tariff concerns growing, despite a temporary pause on China tariffs showing minimal impact on the outlook.

Consumer sentiment remained largely stable in May, edging down just 1.4 index points after four consecutive months of sharp declines, marking a nearly 30% drop since January 2025. A modest rise in sentiment among independents was outweighed by a 7% decrease among Republicans. Most index components held steady, though assessments of current personal finances fell by nearly 10% due to weakening incomes. Tariffs were mentioned spontaneously by nearly 75% of consumers—up from 60% in April—highlighting persistent concerns over trade policy. Interviews were conducted from April 22 to May 13, ending two days after the announcement of a partial pause on tariffs for Chinese imports. While there were slight signs of improved sentiment following this policy change, the gains were insufficient to shift the overall outlook, which remains pessimistic. This muted response mirrors the negligible uptick seen after the April 9 tariff adjustment. Meanwhile, year-ahead inflation expectations rose sharply from 6.5% to 7.3%, with increases across political affiliations, and long-term expectations ticked up from 4.4% to 4.6%, driven primarily by Republicans. The final May report will determine whether the recent tariff pause significantly influences consumers’ inflation expectations.

In line with what we’ve noted in previous reports, expectations have continued to rise, reflecting growing concerns over inflation and persistent uncertainty surrounding trade policy.
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