Key takeaways
US-China tariffs
Markets are taking a significant de-escalation of US-China tariffs — down to 30% from 145% for 90 days — positively.
Federal Reserve
The Fed remains in wait-and-see mode as tariff uncertainty has resulted in upside price risks downside employment risks.
Bank of England (BOE)
The BOE cut interest rates but also struck a hawkish tone because the vote to cut was closer than anticipated.
The 2018 trade conflict between the US and China has felt like an apt analogy to the current environment. By late 2018, business sentiment deteriorated,1 recession concerns rose, and the S&P 500 Index sold off by nearly 20% in a short period.2 By the time investors had become increasingly bearish,3 the policy mix was changing. The Trump administration announced a 90-day tariff pause with China and the US Federal Reserve became increasingly more dovish. The following year was strong for risk assets.4
As the saying goes, history often rhymes. Over the weekend Treasury Secretary Bessent met with Chinese trade officials in Switzerland, and the result appears to be a significant de-escalation of tariffs — down to 30% from 145% for 90 days. Understandably, markets are taking this very positively. While tariffs are higher than last year, it’s a significant step down by the US administration from the worst-case scenario.
Here’s what else happened last week.
1. Fed: Remains in wait-and-see mode
The Fed remains stuck between a rock and a hard place. Uncertainty around tariffs has resulted in both upside risks to prices and downside risks to employment. Our sense is that the next move in rates should be lower, but until the labor market shows greater signs of weakness, we expect the Fed will hold rates where they are. Unemployment claims and payroll data have held up well in recent months. The push-pull between encouraging but backward-looking economic data and current sentiment data means the Fed is likely to remain in wait-and-see mode.
2. BOE: Gradually and carefully cutting
The Bank of England (BOE) cut its policy rate by 25 basis points last week as was widely expected, though the vote split was closer than anticipated with two members voting for no change.5 Survey data have pointed to sticky inflationary pressures in the UK,6 but we expect lower oil prices, a stronger currency, and US tariffs will mean fewer inflationary pressures in the coming months. The UK labor market, while not collapsing, is showing signs of slack.7 Rate cuts are gradually feeding through into lower mortgage rates, which could give the UK consumer more confidence to increase spending later this year. If that happens, we expect domestically focused small-cap UK stocks to potentially benefit.
3. Earnings season: Strong quarter, but guidance hard to give
First quarter earnings season is well underway with more than 75% of S&P 500 Index companies having already reported. Earnings results have largely surprised to the upside in line with the normal rate.8 Forward guidance from US companies, however, reflects heightened uncertainty. Many businesses have so far refrained from issuing negative earnings per share guidance, and mentions of recession during earnings calls have climbed sharply since last quarter. Mentions of layoffs, however, haven’t moved materially higher.
4. Tech: The usual suspects
A look under the hood reveals that the US technology and communication services sectors have led the stock market’s rally in recent weeks.9 This marks a reversal from the first three months of the year, when poor performance in those sectors held the broader market back. Continued weakness outside of tech and communication services means that if the performance of those sectors were to slow again, the stock market’s recent rally could begin to stall.
5. Conflict in Kashmir isn’t meaningful for markets
Tensions between India and Pakistan are rising after the two countries engaged in their worst confrontations in decades. While there’s potential for further escalation, investors should remember that historically the impact of regional geopolitical conflicts on broad markets has tended to be muted. The Pakistan stock markets have sold off heavily,10 but we don’t expect these tensions to have a meaningful impact on broader financial markets.
What to watch this week
| Region | Data release | Why it’s important |
|---|---|---|
| Monday | US federal budget Balance | Some market participants are concerned about the size of the US public debt. These figures will show whether debt growth is increasing or slowing. That can be meaningful for bond yields and term premia. |
| Tuesday | UK labour market data | Employment figures, wage growth, and claimant count data will be watched closely for weakness. The Bank of England has recently voiced worries that these data are softening, and further weakness could mean further rate cuts from it. |
| Tuesday | Germany ZEW indicator of economic sentiment | A signal of how German businesses expect growth, inflation, and other economic indicators to evolve over the coming six months. It’s a measure of business confidence. |
| Tuesday | US Consumer Price Index (CPI) | Inflation data is watched closely. If prices rise more quickly than in previous months, that may mean the next Fed rate cut is further away than the market expects. It will be the first indication of whether retailers are starting to pass on tariffs to consumers. |
| Thursday | Japan Bond and equity flows | Japanese demand for foreign assets will be noted as weakness in the USD, which may mean that Japanese investors prefer to keep money at home now compared to previous years. |
| Thursday | UK gross domestic product (GDP) | Has the UK economy managed to grow in Q1 and has growth accelerated? This data will provide an indication of which sectors of the UK economy are performing better than others. |
| Thursday | European Union (EU) GDP | Has the Eurozone economy managed to grow in Q1 and has growth accelerated? These data will provide an indication of which sectors of the EU economy are performing better than others. |
| Thursday | US retail sales | Will provide an indication of whether households are still spending and possibly trying to buy goods ahead of tariff price increases or whether demand is already slowing. |
| Friday | Japan GDP | Has the Japanese economy managed to grow in Q1 and has growth accelerated. This will provide an indication of which sectors of the Japanese economy are performing better than others. |
| Friday | US housing starts | Housing construction employs a meaningful portion of the US labor market. Rising housing starts are seen as a sign of improving economic activity. |
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Originally Posted on May 12, 2025
Central banks are treading carefully by Invesco US
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