Yields spiked, flattening the curve. Equities rallied broadly, led by Microsoft. The dollar rose again as oil plunged. Gold fell, and economic growth concerns deepened.

Bond prices fell over the week, driven by a sharp rise in yields late in the period. The two-year Treasury yield spiked, marking its steepest increase since October 2024, and reflecting shifting expectations around inflation and monetary policy. The yield curve flattened to its lowest point in nearly three decades, as long-term rates remained relatively stable despite front-end volatility. Growing concerns about persistent inflation—fuelled in part by ongoing trade protectionism, including tariffs on steel, autos, and a broader global tariff wall—are beginning to challenge the market’s earlier assumptions of transitory price pressures.

U.S. equities extended their rally for another week, underpinned by broad-based market strength. Micro- and small-cap stocks outperformed, rising 3.63% and 3.28%, respectively, while large-caps posted a 2.92% gain. The “Magnificent 7” advanced 3.33%, driven by a notable 11.12% surge in Microsoft, which reclaimed its position as the world’s most valuable company. All sectors finished in positive territory, with industrials leading the pack with a gain of over 4%, followed by technology, which rose 3.87%.

The U.S. dollar recorded a second consecutive weekly gain, appreciating 0.51% against the euro amid persistent inflation concerns. In contrast, commodities came under pressure across the board. WTI crude oil declined 7.55%, weighed down by signals from Saudi Arabia indicating a willingness to tolerate lower prices, alongside expectations of increased OPEC+ supply. The sharp drop in oil prices coincided with a first-quarter contraction in the U.S. economy, amplifying concerns over weakening growth and the potential for softer demand. Gold fell 2.49% amid reduced safe-haven demand, while Bitcoin posted a modest gain of 1.33% for the week.

In Q1 2025, the US economy contracted due to high imports, weak government spending, inflation, and concerns about stagflation, despite growth in consumer spending and housing.

In Q1 2025, the US economy contracted by 0.3%, the first decline since 2022, driven by high imports, weak government spending, and persistent inflation. Imports surged as businesses preemptively stocked up ahead of anticipated tariffs, and government spending fell 5.1%, the first negative contribution since 2022. Despite a 1.8% increase in consumer spending and a 9.8% rise in non-residential investment, inflation remained high, with the core PCE deflator rising by 3.5%. This led to concerns about stagflation, as consumer sentiment weakened, and inflationary risks persisted. The labour market added 177,000 jobs in April, but weak wage growth and declining sectors raised fears of a slowdown. The manufacturing sector contracted for the second month in a row. Housing showed signs of recovery with a 6.1% increase in pending home sales, driven by lower mortgage rates, but high prices and economic uncertainty may limit future growth.

In Q1 2025, the US economy contracted 0.3%, driven by high imports, weak government spending, and persistent inflation, with stagflation risks continuing amid consumer concerns and economic uncertainty.

In the first quarter of 2025, the US economy contracted by 0.3% on a quarter-on-quarter annualized basis, marking the first decline since 2022. This contraction was primarily driven by a significant surge in imports, as businesses accelerated their procurement of goods ahead of anticipated tariffs, contributing a 4.8 percentage-point drag on growth. While consumer spending, which accounts for roughly two-thirds of GDP, increased by a modest 1.8%, and non-residential fixed investment rose by 9.8%, government spending experienced a notable decline of 5.1%, largely attributable to cuts in federal expenditures, which subtracted 0.25% from overall GDP. This marks the first negative contribution from government spending since 2022. Inflationary pressures were more pronounced than expected, with the core PCE deflator rising by 3.5%, signalling persistent inflationary risks ahead of potential tariff-induced price hikes and supply chain disruptions later in the year. As consumer sentiment weakens, driven by reduced purchasing power and heightened concerns about job security, the stagflation narrative is poised to dominate economic discussions throughout 2025. Ongoing government expenditure cuts and business uncertainty over future tariffs and supply shortages are expected to dampen hiring and investment. Given the inflationary backdrop, the Federal Reserve is likely to refrain from significant interest rate cuts in the near term, although it may take more aggressive action by the third quarter, particularly as inflation in services, including leisure, hospitality, and housing, begins to exert greater downward pressure on the broader economy.

We expect continued inflation and lower growth, with stagflation risks persisting as high import levels, reduced government spending, and consumer concerns weigh on the economy.

Inflation stalled, with flat PCE and core PCE growth, signalling improved conditions. Combined with Q1 economic contraction, this may lead the Fed to cut rates.

In March, inflation essentially disappeared, with both the PCE price index and core PCE showing no growth, indicating that average prices remained flat for the month. This marks a significant improvement compared to the rapid rise in prices observed at the start of Q1 in January. The core PCE, the Federal Reserve's favoured inflation measure, rose by 0.03%, in line with expectations, keeping the year-on-year rate at 2.6%, its lowest level since March 2021. Monthly PCE inflation showed a 0.045% decline, marking the largest drop since the COVID lockdowns, bringing the annual rate to 2.3%, the lowest in five months. Prices for goods decreased by 0.5%, while service prices increased by 0.2%, moderating from February’s 0.5% rise. Food prices rose by 0.5%, and energy prices fell by 2.7%. Housing prices saw their largest monthly increase since October, up 0.39%. A notable drop in non-durable goods was the primary drag on core PCE. Core services, excluding housing, grew by 0.04%, down from February’s 0.6% rise. The upward revision to February’s data (from +0.37% to +0.50%) maintains a 6-month annualised rate of 3%, while the 3-month annualised rate stands at 3.5%, both above the 2.6% annual rate, near a four-year low. This data provides a breather, and combined with the negative economic growth in Q1, could open the door for the Fed to cut rates in the second half of the year.

We expect that tariffs and ongoing trade wars will continue to drive inflationary pressures, disrupt supply chains, and slow economic growth, reducing the likelihood of short-term rate cuts.

The US added 177,000 jobs in April, but concerns over tariffs and trade uncertainty, weak wage growth, and declining sectors suggest a potential job market slowdown ahead.

The US labour market showed resilience in April, adding 177,000 jobs, surpassing the anticipated 138,000. However, beneath this solid headline figure, concerns are mounting as business and consumer sentiment surveys reveal growing unease about the impact of tariffs and trade policy uncertainty. While the unemployment rate remained steady at 4.2%, wage growth came in weaker than expected, rising only 0.2% month-over-month and 3.8% YoY, falling short of the consensus estimate of 0.3% and 3.9%, respectively. Additionally, revisions to prior months’ data showed a downward adjustment of 58,000 jobs, which means the net effect of April’s gains is closer to expectations. This suggests that while the job market remains stable for now, there are emerging signs that it could cool in the coming months, especially as the effects of trade tensions begin to take a greater toll on economic activity.

A deeper look into the employment report shows that the bulk of job growth came from sectors like private education and healthcare services, which added 70,000 jobs, and leisure and hospitality, which grew by 24,000. Federal government employment continued to decline, with a loss of 9,000 jobs in April, following losses of 8,600 jobs in February and 3,800 jobs in March. Additionally, the trade and transport sector added 32,000 jobs, driven by a surge in imports earlier this year, but it faces potential vulnerabilities due to declining shipping activity. As the economy faces pressures from tariffs and reduced consumer confidence, the risk of a slowdown in job growth increases. Consumer sentiment surveys, such as the University of Michigan’s unemployment expectations, have shown a sharp spike, signalling growing concern about future job prospects. Furthermore, contraction in the ISM employment indices for both manufacturing and services further suggests that weaker job numbers could follow in the months ahead, potentially prompting more aggressive interest rate cuts from the Federal Reserve.

We expect that the US labour market could face a slowdown in the coming months, influenced by trade uncertainties, weak wage growth, and challenges in key sectors.

U.S. manufacturing contracted for a second month, with PMI at 48.7. Weak new orders, production drops, and rising prices highlight ongoing sector challenges, despite some growth in select industries.

U.S. manufacturing activity contracted for the second consecutive month, with the Manufacturing PMI registering 48.7, slightly below expectations and marking the lowest level since November 2024. This decline was driven by continued weakness in new orders, which remained in contraction at 47.2 (up from 45.2 in March), and a significant drop in production, which fell to 44.0 (down from 48.3 in March). Employment showed a modest improvement surpassing expectations but still reflecting job cuts across the sector as companies remained cautious in a volatile economic environment. Prices continued to rise driven by higher costs for key raw materials such as steel and aluminium, exacerbated by tariff pressures and increasing operational costs. The contraction in new orders, production, and exports, alongside slower supplier deliveries and inventory growth, suggests ongoing challenges for the sector, despite certain industries such as Petroleum & Coal Products, Computer & Electronic Products, and Machinery experiencing growth. Furthermore, the New Export Orders Index saw a sharp decline, underscoring the weakness in global demand.

We expect more layoffs, ongoing inflationary pressures, and sector weakness due to rising tariffs, all of which will continue to exacerbate challenges in U.S. manufacturing activity.

Pending home sales rose 6.1% in March, driven by lower mortgage rates and higher inventory. Despite rising home prices, economic uncertainties may limit future growth.

Pending home sales surged by 6.1% in March, significantly surpassing the 1.0% estimate and marking the largest increase since December 2023. This jump was driven by a 20-basis point dip in mortgage rates, which spurred interest from rate-sensitive buyers, coupled with higher inventory levels that provided more choices for prospective homeowners. Although pending sales remain down 0.6% year-over-year, the month-over-month growth reflects a positive shift in the housing market. Additionally, purchase mortgage applications saw a notable uptick, signalling a rise in buyer interest as affordability improves slightly. However, home prices remain high, and while their growth is slower than anticipated, they are still on the rise. Despite these optimistic signs, the recent increase in mortgage rates and persistent economic uncertainties, including inflationary pressures and concerns over the broader economic outlook, may dampen momentum in the coming months.

We expect that the positive momentum in pending home sales may continue, though rising mortgage rates and economic uncertainties could limit growth in the coming months. We do not expect a short-term recovery in the sector.