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Daily Economic Update
22.05.2025US: Equity and bond markets fall on mounting debt worries amid Trump’s tax cut plans. US equity and bond markets slumped yesterday, with the S&P 500 posting a 1.6% daily drop and UST 10Y yields rising by around 11 bps to close an over three-month high of almost 4.6%. Republicans have been struggling to gain consensus on Trump’s “One Big, Beautiful Bill” that would extend soon-expiring existing tax cut provisions and provide newer tax breaks. Considering only minor offsets in its current form, the reconciliation bill could potentially add a cumulative $3-5 trillion to fiscal deficits under various scenarios over the next decade, according to the nonpartisan Committee for a Responsible Federal Budget. As a reminder, Moody’s last week stripped the US of its top-notch ‘Aaa’ rating, citing worsening fiscal and debt trajectories, seeing public debt to GDP rising to 134% by 2035 from 98% currently. Given a razor-thin majority in Congress, bringing all warring Republican factions on to the same page is challenging for Trump and other GOP leaders that hope to advance the bill to the House floor for a vote later today. For now, key sticking points include increasing state and local tax (SALT) deductions and cutting Medicaid spending by bringing forward work requirements. We note that in case the House passes the bill, the latter will advance to the Senate, which can make its own changes to the bill. Eventually, the House and the Senate need to approve the same bill before it can be signed into law by Trump. Markets extended the sell-off yesterday as the UST 20Y auction drew a tepid response, with investors remaining concerned about the US administration’s fiscal priorities. Putting public debt on a sustainable path, which it is not currently, remains a key risk to the US economic outlook in our view.
UK: CPI inflation jumps above forecast; markets pare interest rate cut bets. UK CPI inflation in April surged to a 15-month high of 3.5% y/y from 2.6% in March, ahead of the 3.3% market forecast and the BoE’s prediction of 3.4%. On a monthly basis, consumer prices increased by their most in two years at 1.2%. The core rate also jumped to 3.8% y/y from March’s 3.4%, with services costs rising by 5.4% (versus 5% BoE forecast) after a 4.7% increase in March. The rise in inflation was mainly driven by utility and other government charges, which pushed the housing and household services (7.8% y/y from March’s 1.8%), and transportation (3.3% from 1.2%) components up, along with higher airfare and recreation activities costs. Given the previously announced hikes in government-administered fees, inflation was already expected to rebound; still, a higher-than-forecast jump, especially in services, pushed markets to pare policy interest rate cut bets. Markets now see a lower probability of two 25 bps cuts by the end of 2025 from the current rate of 4.25%, with the first move seen not before September.
Japan: Composite PMI falls into contraction in May on slowing expansion in the services sector. The flash estimates for the composite PMI fell to 49.8 in May 2025 from the final reading of 51.2 in April as the manufacturing sector remained in contractionary territory while the expansion in the services sector slowed amid growing concerns about future demand. The manufacturing PMI saw a marginal increase to 49.0, though remaining in contractionary territory for the eleventh consecutive month as new orders and foreign sales declined amid concerns related to US tariffs while output fell at a faster rate. Business sentiment rose slightly from the five-year low seen in April, though remaining near the weakest reading since the pandemic. On the other side, the services sector remained in expansionary territory, with the PMI at 50.8, down from April’s reading of 52.4 due to weaker growth in new business, exports, and employment. The subdued readings of the PMI came following the quarterly contraction seen in Q1 2025 GDP growth of 0.2% q/q (-0.7% annualized), shedding more light on the fragile recovery amid rising trade uncertainties and persistent inflationary pressures.
Japan: Trade balance flips into a deficit in April. The trade balance on goods fell in April into a deficit for the first time since January 2025, at JPY116 billion, down from a surplus of JPY559 billion in the previous month, mainly due to softer-than-expected export growth of 2.0% y/y while imports declined by 2.2%. Export growth decelerated to a 7-month low amid rising uncertainties due to US tariffs and lower demand for manufactured goods (-3.9% y/y versus -0.1% in March), semiconductor machinery (-1.5% versus 14.6%), and motor vehicles (-5.8% versus 7.1%). Meanwhile, imports fell mainly due to steeper decline in mineral fuel imports (-13.0% y/y versus -12.5% in March), in line with the decline in global oil prices, and a slowdown in imports of electrical machinery (2.8% versus 10.6%), chemicals (0.7% versus 11.3%), machinery (6.3% versus 15.6%), and foodstuff (1.3% versus 3.6%). The impact of US tariffs is becoming more evident on Japan’s exporting sector, raising the risks of going into a technical recession following the contraction in GDP in Q1 2025 before the levies began hitting in earnest.
