Things Take a Turn for The Worse Following Lousy 20-Year Auction: May 21, 2025

Stocks were recovering from this morning’s losses as optimism regarding a potential transatlantic trade deal countered concerns about the GOP’s ability to pass a taxation package in short order. But worries that the proposed legislation would worsen Washington’s fiscal condition paired with certain corporate earnings reports pointing to a sluggish consumer limited the momentum of the recovery. And while deficit and debt angst sent yields north and the dollar south, tech sentiment was boosting the indices on AI cheerfulness and the profitability benefits of a softer greenback, since those global magnificent 7 firms are paid in a plethora of distinct currencies. Furthermore, anecdotal evidence suggesting that the Trump administration wants a weaker US currency is also weighing on the dollar benchmark which is at its lowest level in about a month. The topic has been on the agenda of foreign meetings between the US and international counterparts. Things took a turn for the worse following this afternoon’s 1:00 pm auction of $16 billion 20-year Treasury bonds, however, as light demand propelled yields to the nosebleeds and equities to the basement.

Investors Buy Bitcoin, Gold and Forecast Contracts

Against the backdrop of an empty domestic economic calendar and jumping interest rates, investors are upping their exposures to silver and gold metal futures, forecast contracts as well as bitcoin on deregulation hopes. But folks are reducing their holdings of equities, Treasuries across the curve, greenback wagers and cyclical commodities.

GOP Weighs Fiscal Cuts Against Midterm Election Outcomes

Washington developments will dominate the headlines for the rest of the week amidst a lack of catalysts on the corporate earnings and economic data fronts. In the District of Columbia, taxation and trade have taken center stage. President Trump is feeling positive about the progress on the domestic negotiations, stating that tax legislation is near the finish line as some GOP hardliners are battling for increasingly deep expenditure reductions following a deal to raise the SALT deduction to $40,000. Certain fiscal hawks in the Republican party are looking for sharper cuts to Medicaid programs through an acceleration in work requirements to December of 2026, compared to 3 years further. The group is also interested in lowering food assistance and disability outlays while significantly paring back or ending tax benefits associated with energy-efficiency, or green, investments. Others in the GOP are extremely concerned about the negative ramifications that could haunt them in the midterm elections, as austerity measures maintain a heavy tendency to anger the constituency. At the moment, however, the IBKR prediction market still expects the GOP to remain in control of the Senate with a 69% probability, but the Democrats are projected to take back the House of Representatives, sporting odds of 62%.

Source: ForecastEx

All Eyes on Washington and Trade

In conclusion, a trade deal with the EU would add fuel to the fire of the momentous recovery rally from the early April lows. An inked agreement shall send growth estimates north and inflation expectations south, while also serving as a strong precedent for other nations to possibly follow. The importance of mutual understanding between the two regions is pivotal, since the sharing of democratic values is critical to a stable world order. Furthermore, together with the UK, the partners comprise almost half of the global economy, so firmer alliances serve to significantly reduce the potential negative impacts of adversarial postures related to cross-border commerce. 

International Roundup

UK Inflation Heats Up

Price pressures in the UK were stronger than anticipated in April and accelerated from the previous month. Shelter costs, including household energy and other utilities, are to blame. The Consumer Price Index (CPI) jumped 1.2% month over month (m/m), exceeding both the consensus projection of 1.1% and the March print of 0.3%. The year-over-year (y/y) metric advanced 3.5%, up from 2.6% in March and loftier than the forecasted 3.3%. It was the largest increase in two-and-a-half years. Among m/m changes, water and sewerage charges were up 26.1%, according to the Office of National Statistics. Meanwhile, other utility stickers moved northward following the government raising the cap on energy.

The Core CPI, which excludes energy, food and tobacco prices, climbed 1.4% m/m, surpassing the 1.2% estimate and the preceding month’s 0.5% result. When compared to April of last year, the gauge was up 3.8% after gaining 3.4% y/y in March. Economists had estimated a 3.6% hike.

Japan’s Trade Balance Turns Negative

Japan’s trade balance plunged from a 598.4 JPY billion surplus in March to a 115.8 JPY billion deficit last month. Exports grew only 2% y/y, which matched the consensus estimate but was only half the pace of the preceding month. Imports fell 2.2% y/y after expanding 1.8% in March. Economists had forecasted a 4.5% drop. Tariffs imposed by President Donald Trump contributed to a 1.8% decline in exports to the US. Exports also fell to Europe and China by 5.2% and 0.6%. The trade deficit follows a first quarter in which GDP contracted.

And Business Sentiment Falls

The Reuters Tankan Index for May fell to 8 from 9 in April, signaling that manufacturers are less optimistic about the business environment. While the score still shows positive sentiment, businesses cited US tariffs, higher input costs and the weak Mainland China economy as reasons for pessimism.

New Home Prices Drop in Canada

The Canadian New Housing Price Index sank 0.4% m/m in April after recording no change in the preceding month, according to Statistics Canada. Economists expected the gauge to climb 0.1%. Separately, the Canadian Real Estate Association reported that new home sales were down 0.1% m/m in April and the number of new listings contracted by 1%.

Aussie Prospects Dwindle

The outlook for Australia’s economy has weakened with the six-month annualized growth rate of the Westpac–Melbourne Institute Leading Index slowing from 0.5% in March to only 0.2% last month. Westpac maintains that the gauge points to economic growth trends in the next three to nine months. The institution attributes the decline to uncertainty regarding global trade and less supportive commodity charges. Within the index, the financial markets and sentiment-based components were the largest drags on the headline. Consumer segments were additional headwinds. Commodity prices, industrial production and the yield spread had previously been significant drivers of progress but weighed on results last month.