After the tariff shocks and turnarounds in April, May probably seemed like a calmer month, but there was plenty of political action to move the markets. On a positive note, President Trump pushed out the deadline for trade deals with China and the European Union, and the United States Court of International Trade ruled against many of his tariffs1. However, we expect the president’s team to find ways around this ruling, and the trade temperature to rise again. As usual though, we try to focus on the real economy and corporate activity.

Beginning in the US, May’s ‘hard’ economic data remained resilient. Job growth exceeded expectations, while the unemployment rate held steady at 4.2% and wage growth at 3.8%. Consumer inflation (CPI) fell again, and the Federal Reserve’s preferred measure (core PCE2) ticked down to 2.5%, edging closer to the official 2% target. Even so, the Federal Reserve (Fed) defied the president and declined to cut US rates in May, citing the enormous economic uncertainty. The ‘soft’ data also came in better than expected. On the business side, ISM (Institute for Supply Management) surveys showed surprising improvement in new orders, in both manufacturing and services. On the consumer side, sentiment and expectations picked up a little and inflation fears subsided slightly. It wasn’t all positive though, as retail sales and industrial production softened on the month.

In Europe, the data was mixed. Eurozone inflation held steady just above the 2% target, while unemployment ticked up 0.1% to 6.2%. Both consumer and economic confidence improved slightly, and the European Central Bank (ECB) is expected to cut rates again in June. The United Kingdom saw Q1 GDP3 growth come in above expectations at 0.7%, but utility costs and tax rises pushed inflation up to 3.5%, likely pushing back the next rate cut from the Bank of England (BOE) by a few months. In Japan, Q1 GDP growth fell below zero, as net exports were so negative on the trade confusion. Domestic consumption held up well though, and core inflation (ex. fresh food) hit its highest level in two and a half years, raising hopes that the Bank of Japan (BOJ) might finally raise rates again. Lastly in China, industrial profits improved, but retail sales slowed slightly, and inflation stayed just below zero.

Figure 1: Equity market returns before and after the tariff pause

Source: MSCI, Bloomberg. Returns are price returns in EUR.

The stock market recovery continued into May, and despite a few setbacks ended up over 5% on the month (in USD). The sectors that gained the most, technology and communications services, were the ones that had been hit the hardest in the downturn. The laggards were the defensive sectors, i.e. healthcare, staples and utilities. On a regional basis, the US saw the strongest returns, with Europe, the UK and emerging markets a few points behind. In style terms, the rotation towards value that we saw in Q1 was reversed back into growth in the April-May recovery. May also brought the remainder of the Q1 reporting season, with earnings growth surprising to the upside across the world. The US was again the stand-out region, with double-digit growth versus Q1 2024, although estimates for the second half of the year have come down since President Trump’s Liberation Day. As usual, all eyes at the end of the season were on Nvidia, the superstar chipmaker, and their earnings did not disappoint. The stock is now up over 40% since its April low, after being down almost 40% from its January high.

As in April though, the interesting market action was in bonds. The post-Liberation Day spike in US treasury yields had been violent enough to convince President Trump to pause on reciprocal tariffs, but he pushed yields up again in May. This time it was the introduction of his ‘Big Beautiful Bill’, an enormous package of tax and spending cuts that could add another US$2.4tn to the national debt. Moody’s downgraded the credit rating of the US government from AAA to AA, the last major rating agency to do so. With UK and German yields rising too, it was a negative month for global bond investors. Bond hawks are watching treasury auctions closely now for signs of a fall-off in investor demand, and while most attention has been on the US, the Japanese market has shown some signs of slippage at the longer maturity end.

Figure 2: 30-year government bond yields from the US and Japan

Source: Bloomberg. Each yield is in its local currency.

After the dollar’s sharp fall in March and April, the improved trade outlook helped it to stabilise in May versus the euro and pound. In commodity markets, gold prices cooled to end flat on the month after spiking above US$3,400/oz, while the Israel-Iran tension outweighed quota increases to push oil prices back above US$60 per barrel. Lastly, in the crypto world, anticipation of looser regulation in the US helped to push the bitcoin price back over US$100k.

1 Many of this year’s tariffs were imposed under the 1977 International Emergency Economic Powers Act (IEEPA), and the court ruled that IEEPA did not give the president to impose these tariffs.

2 PCE is personal consumption expenditure, and core means excluding food and energy.

3 GDP is gross domestic product, the standard measure of economic activity.