Economic and Market Overview
May 2025
Equities and Treasury yields rose, and credit spreads tightened during a month in which the trade policy rollercoaster continued, Moody’s downgraded U.S. debt, and the House advanced a reconciliation bill that would further increase the federal deficit.
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The S&P 500 returned 6.3% for the month and finished up 18.9% from its 4/8 trough. The strongest two days occurred after a China-U.S. trade deal was announced and after President Trump granted a delay to tariffs on the E.U. that he had announced just days earlier. Treasury yields rose by 23-28 bps across the curve, but along the way the 30-year rate hit 5.15% for the first time since 2007. Credit spreads tightened sharply, even as supply picked up. J.P. Morgan reported $155 billion in total investment grade issuance for the month, 22% over the average of the prior four Mays. After starting off the month by hitting a new 3-year low, WTI futures jumped by over $5/bbl after the China-U.S. deal was announced, but crude retraced much of the gain as traders expected another output hike to be announced at the 5/31 OPEC+ meeting. Likewise, the Dollar Index’s post-deal rally did not survive the final two weeks, ending effectively unchanged.
Economic Data
While nonfarm payrolls grew at a 177,000 pace in April, topping expectations by 39,000, the prior two months were revised lower by a net 58,000. The unemployment rate held steady at 4.2%, while the participation rate ticked up 0.1% for the second straight month, to 62.6%. For May, consensus calls for a 125,000 pace of NFP growth and no change to the unemployment rate when data are released on June 6. Growth in retail sales decelerated in April to just 0.1%, though the rate was still 0.1% over forecasts and the March figure was revised 0.2% higher. Consumer sentiment indices contradicted each other, likely due to timing, as the University of Michigan’s preliminary release printed at a near 3-year low on 5/16. Eleven days later, however, the Conference Board reported its first monthly increase since November, a surprise 13.3 point jump driven by surging expectations attributed to roughly “half of the responses [having been] collected after the May 12 announcement of a pause on some tariffs on imports from China.” Housing data were mixed again, as were hard data in manufacturing, while S&P Global’s US Manufacturing and Services PMIs each topped forecasts. U.S. GDP fell at a 0.2% rate in the first quarter, as the second release included a 0.1% upward revision. The underlying details were soft, however, as personal consumption was actually revised down 0.5%, to 1.2%, but was offset by upward revisions to categories associated with tariff front-running. Q2 GDP is expected to return to positive territory.
Inflation
Inflation data for April were softer than expected again as economists waited for tariff costs to show up in higher consumer prices. Headline and core PCE rose by 0.1% MoM, in line with forecasts. The University of Michigan once again reported higher near-term inflation expectations from respondents and the Treasury market responded via a widening of longer-term breakevens. Although the 2-year level finished 14 bps lower at 2.62%, 5y, 10y and 30y rates rose by 8-10 bps, to 2.39%, 2.33% and 2.30%, respectively. The 5y/5y forward rate climbed 8 bps to 2.30%.
Federal Reserve
The FOMC left their policy rate unchanged at their meeting early in the month, embracing the wait-and-see attitude that they have adopted in response to the extreme uncertainty surrounding the trade war. The wisdom of that strategy was confirmed later in the month when President Trump de-escalated the trade war and the Court of International Trade threw the legality of reciprocal tariffs into doubt. Market pricing of the monetary policy path shifted more hawkish during May, as the de-escalation reduced the left-tail risk of a deeper recession. The December 2025 SOFR futures repriced from four cuts this year to two. We think even two is too many, as we still expect tariff-induced inflation to delay the first rate cut until January 2026.
Sources: Bloomberg Index Services Ltd., Bloomberg.
This overview is for informational purposes only. The information has been obtained from sources considered to be reliable, but the accuracy and completeness are not guaranteed. There is no assurance that any economic trends mentioned will continue or that any forecasts will occur. Economic data are as of the dates noted.
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