Bond Vigilantes Throw A Thumps Up To GOP Tax Legislation: May 22, 2025

Stocks are recovering from yesterday’s Treasury auction-sparked selloff as the bond vigilantes throw a thumbs up to the GOP taxation bill that narrowly passed the House earlier today. Fiscal hawk hardliners got their way in the proposed legislation, which includes more expenditure reductions than the original version. But the plan is on its way to the Senate and a few Republicans in the upper chamber are voicing the need for significant modifications. Equities are also being bolstered by strong beats in this morning’s flash PMI data on both the services and manufacturing fronts while yields are getting additional help from OPEC+ discussions favoring further production increases. The stateside economic calendar also featured range-bound initial and continuing unemployment claims as well as a miss on existing home sales. Washington is the greatest source of optimism for equity and fixed-income bulls on this Thursday, however, as investors scoop up offensive stocks sporting growth and cyclical characteristics, Treasuries across the curve, greenback futures, bitcoins and forecast contracts. Folks are unwinding their volatility hedges, unloading shares in defensive sectors and reducing commodity exposures ex copper. 

Tax Legislation Cleared for Senate Consideration

The House of Representatives this morning passed an extension of expiring 2017 tax reductions and other provisions, such as increasing the allowance for state and local tax levies from $10,000 to $40,000. The action clears the way for the proposal to go to the Senate, where a similar battle among elected officials is likely to play out. The lower chamber accomplished the agreement after finding a middle path between hardline conservatives who wanted deeper spending reductions. If it passes and becomes law, the legislation would also raised the standard deduction and child credit while eliminating taxes on Social Security benefits, overtime pay and tips. In a related matter, the bill would increase the debt ceiling, which is expected to be reached in August.

Domestic Demand in US Picks Up

The US economy strengthened considerably this month with robust domestic demand countering weak foreign ordering. S&P Global’s Flash PMIs for services and manufacturing accelerated to 52.3 from 50.8 and 50.2 while also beating the projections of 50.8 and 50.1. Sentiment and production improved as trade prospects fared much better than feared so far. Those positives offset the negative effects of inventories, prices, employment and supply chains. Firms worked down their inventory and hiring levels due to perceptions of an uncertain path ahead.

Sales of Existing Homes Fall Short of Expectations

Rising mortgage rates alongside elevated prices weighed on existing home sales last month as listings expanded meaningfully. April closings came in at 4 million seasonally adjusted annualized units (SAAU), beneath the 4.1 million projection and the 4.02 million from March. The headline slowed its pace by 0.5% month over month (m/m) and was led south by the West and Northeast regions sporting declines of 3.9% and 2%. The Midwest rose 2.1% m/m, however, and the South was unchanged during the reporting interval. Across asset classes, the cooperative/condominium segment experienced a decrease of 2.6% m/m while single-family stumbled by 0.3%. Conditions are turning to a seller’s market with inventory growing significantly, up 9% m/m and 20.8% year over year (y/y). It equates to a 4.4-month supply ratio at the present’s transaction rate, higher than March’s 4 and the 3.5 from the year-ago period. 

Unemployment Claims Are Still Range Bound

The labor market remained stable in the last two weeks, according to this morning’s weekly data. Initial unemployment filings fell modestly to 227,000 last week from 229,000 in the prior print and came in beneath the 230,000 median estimate. Continuing claims did increase to 1.903 million during the week ended May 10, however, from 1.867 million in the previous report, and arrived above the expected 1.890 million. Four-week moving average trends moved north on both fronts, from 230,500 and 1.870 million to 231,500 and 1.888 million.

Favorable For the Trio of Growth, Inflation and Term Premiums

Today’s mix of news offered stronger growth prospects, lighter inflation expectations and lessened term premiums. Economic data signaled premium gasoline in the tank of the expansion as domestic consumers are shopping in force so far this month after turning the light switch south in April. The softer momentum last month was driven by efforts to recover from robust shopping in March, which was motivated by the liberation day tariffs on April 2. Meanwhile, we have not had heavy price pressures so far in this administration despite trade related fears and developments regarding decreased outputs from OPEC+ strengthening confidence that will remain the case. My model’s prediction for this month is at just 0.1%. Crude oil is a critical commodity in both direct and indirect fashions and its weaker price trend is a welcome development for equity and bond bulls alike. Finally, deficit estimates got curbed, bringing, yields lower after the GOP included some of the more significant expenditure reductions in the package, which were integral for the fiscal hawk hardliners.

International Roundup

Eurozone Activity Contracts

Sluggishness in the services industry pulled the HCOB Composite PMI down from 50.4 in April to 49.5 for May, placing it below the contraction/expansion threshold of 50 for the first time in five months. Economists expected a result of 50.7. Weakness was depicted by the Eurozone Services PMI Business Activity Index sinking to a 16-month low of 48.9 after hitting 50.1 in April. Conversely, the Eurozone Manufacturing PMI climbed from 49 to 49.4, a 33-month high. The consensus estimate anticipated that manufacturing would increase into the positive level of 50.3. New orders overall declined again and services output fell, but manufacturing production grew for the third month.

April’s S&P Global PMI had recorded a second-consecutive month of job growth, but that ended in May, with the metric unchanged. Regarding prices, input costs rose for services while falling for manufacturing. Selling inflation, meanwhile, eased, increasing in services but stumbling in manufacturing.

And Continues to Weaken in the UK

Business activity continued to slow in the UK, but the decline moderated modestly with the S&P Global Composite PMI Flash reading of 49.4 this month strengthening from April’s 48.5 score. It narrowly surpassed the economist projection of 49.3. For this month, the services PMI moved from the contraction level of 49 in April to 50.2, slightly above the estimate of 50. The pace of manufacturing weakness, however, accelerated, with the sector’s PMI dropping from 45.4 in April to 45.1 and missing the consensus target of 46. Overall sentiment improved but is still subdued. The change reflects the recent US and UK trade agreement that reduced certain tariffs implemented as part of a trade dispute. Meanwhile, companies reported aggressively cutting their workforce, especially in manufacturing, where demand concerns have been accompanied by loftier labor costs resulting from increased premiums for the National Insurance program and a higher minimum wage.

Singapore GDP Slightly Stronger than Estimated

Singapore GDP grew slightly faster in the three months ended in March than expected with the city-state issuing a final print of 3.9% y/y compared to an earlier estimate of 3.8%, according to the Ministry of Trade and Industry.