Key takeaways
Fiscal fears
Fiscal fears dominated the market last week before President Trump’s escalation in tariff threats on Friday.
Interest rates
US Purchasing Managers’ Index and labor data could point to the Federal Reserve holding current level of rates for longer.
UK inflation
Higher UK inflation reflects higher utility bills and airfares, but is unlikely to deter further Bank of England rate cuts.
Fiscal fears and rising bond yields dominated the market narrative last week. For some, perhaps, it was a break from worrying about trade and tariffs — but that break was brief. On Friday, President Trump threatened a 50% tariff on the European Union (EU) starting in June1 and a 25% levy on Apple.2
We’re not in the camp that thinks a US default is a meaningful probability (noted in our article last week), but we do think fiscal concerns could manifest in higher US bond yields and higher term premia.
‘Big Beautiful Bill’ brings fiscal worries
Trump’s Big Beautiful Bill — a wide-ranging legislative package that includes tax breaks, spending cuts, and much more — narrowly passed the US House of Representatives on Thursday by a 215-214 vote. It now goes to the Senate. Even though the Republicans have a larger margin in the Senate (53-47) compared to the House, passage might not be smooth, and changes to the bill are expected.
Some of the fiscal hawks in the Senate aren’t happy with the idea of raising the debt ceiling by some $4 trillion,3 which is included in the bill. Including the debt ceiling puts an effective deadline on passing the bill around late July or early August. That’s when the US Treasury is projected to run out of money, according to the Congressional Budget Office.4
The bill extends the Trump 1.0 tax cuts, due to expire at the end of 2025, and pushes any cuts until after the next election.
US bond yields: Higher is the path of least resistance
The US Treasury auctioned 20-year bonds on Wednesday with a 5% coupon rate that was the highest since the tenor was reintroduced in 2020.6 It wasn’t quite as strong as the market would have liked, in our view, and long-end yields moved higher.7 Some investors may have preferred short-term US Treasuries or foreign bonds, given the lack of additional yield from longer-dated US Treasuries or the potential for foreign currency to appreciate versus the US dollar. We would be wary of reading too much into this auction. The 20-year typically doesn’t have the strongest demand at the best of times.
Still, the fact that yields moved higher last week8 and the US dollar lower9 may tell us that the normal link between yields and currencies is no longer there. Fiscal and growth concerns have been driving the dollar lower, and we think that trend will persist. US Treasury yields are more likely to move higher than lower while fiscal concerns remain, in our view.
President Trump is calling for the Federal Reserve (Fed) to cut rates.
Tariffs: Threats are back
After a few weeks of respite from tariff escalation, there isn’t too much we can say about Trump’s threat to raise tariffs on the EU and Apple, except that market participants should probably get used to this constant waxing and waning in tariff news. Markets might naturally swing around with the news flow. Our takeaway from reading Trump’s Art of the Deal is that this is part of his process to throw parties off balance. After the initial aggressive asks and then the step back, it appears we’re in a period of upping the ante again.
US labor market: Data should keep Fed on hold
The Flash Composite Purchasing Managers’ Index printed 52.1 for May, compared to 50.6 in April.10 US initial jobless claims ticked marginally higher last week but remain low by historical standards.11 Broadly, US labor market data still suggests that the US economy isn’t headed for an imminent recession. While this remains the case, we see little reason for the Fed to cut rates further.
UK inflation: Higher than expected
UK headline Consumer Price Inflation (CPI) for April came in at 3.5%, significantly higher than the March figure of 2.6% and above Bloomberg consensus forecasts.12 A higher inflation reading was widely expected as April saw utility, mobile phone, road tax, and TV license prices rise. That wasn’t a surprise. At face value, however, airfares rising by 16.2% compared to last year was of greater importance and meant services inflation rose by 5.4%.12 The Bank of England (BOE) watches services inflation closely, and this higher rate calls into question the speed of the cutting cycle. The pound rallied on the news.13
EU-UK deal: Step in right direction
Last week’s EU-UK summit concluded with a series of agreements and statements pointing to closer alignment in Europe. The agreements pave the way for greater coordination and cooperation on defense procurement and migration. Also, the agreement to align on sanitary and phytosanitary, controlling plant disease areas, covering the UK and EU may make it easier for agricultural products to be traded across the region once more. In response, EU fishermen have access to UK waters for another 12 years. These agreements aren’t game-changing in and of themselves, but they could indicate improvement in the direction of EU–UK relations over the coming years. At the margin, this news is positive for the British pound and euro.
What to watch this week
| Data release | Why it’s important | |
|---|---|---|
| May 27 | US durable and capital goods orders | Insight into health and direction of manufacturing sector and US economy |
| May 27 | Germany retail sales | Reflects health of German consumer |
| May 27 | Germany consumer confidence | Insight into potential future growth of German consumption |
| May 27 | France Consumer Price Index (CPI) | Inflation measure helps give insight into next potential policy decisions by European Central Bank (ECB) |
| May 28 | US Federal Open Market Committee (FOMC) meeting minutes | Further insight into future monetary policymaking |
| May 28 | France consumer spending | Reflects health of French consumer |
| May 28 | France gross domestic product (GDP) | Details overall health of France’s economy |
| May 28 | Germany unemployment rate | Details health of German job market |
| May 28 | European Central Bank (ECB) April consumer expectations survey | Timely insight into how euro area households perceive and anticipate key economic variables |
| May 28 | NVIDIA Q1 earnings report | Earnings release by one of largest US companies could impact near-term market direction |
| May 29 | US gross domestic product (GDP) | Perspective on how economy was fairing ahead of the trade conflict |
| May 30 | US personal consumption expenditures (PCE) | Fed’s preferred measure of inflation provides insight into direction of monetary policy |
| May 30 | Germany, Italy, and Spain consumer price index (CPI) | Inflation measure helps give insight into direction of monetary policy by European Central Bank (ECB) |
—
Originally Posted on May 27, 2025
‘Big Beautiful Bill’ brings fiscal concerns by Invesco US
Footnotes
- Source: CNBC, “Trump calls for 50% tariff on EU, says he’s ‘not looking for a deal’ with bloc,” May 23, 2025.
- Source: CNBC, “Trump says Apple must pay a 25% tariff on iPhones not made in the U.S.,” May 23, 2025.
- Source: Center on Budget and Policy Priorities, May 22, 2025.
- Source: Congressional Budget Office, “Federal Debt and the Statutory Limit, March 2025,” March 26, 2025.
- Source: Moody’s, “Moody’s Ratings downgrades United States ratings to Aa1 from Aaa; changes outlook to stable,” May 16, 2025.
- Source: Bloomberg L.P., May 23, 2025, based on the 20-year US Treasury rate.
- Source: US Treasury, May 23, 2025. The bid-to-cover ratio was 2.46, compared to an average of 2.52 since 2019.
- Source: Bloomberg L.P., May 23, 2025, based on the 10-year US Treasury rate.
- Source: Bloomberg L.P., May 23, 2025, based on the US Dollar Index, which measures the value of the US dollar versus a trade-weighted basket of currencies.
- Source: Bloomberg L.P., May 23, 2025.
- Source: US Department of Labor, 5/17/25.
- Source: UK Office of National Statistics, April 30, 2025.
- Source: Bloomberg L.P., May 23, 2025, based on the value of the British pound versus the US dollar.
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