May 2025, In the Loop
Major stock indexes finished the week lower. Small- and mid-cap indexes fared worst, while the S&P 500 Index and Dow Jones Industrial Average both fell back into negative territory for the year after ending the prior week slightly positive. The technology-heavy Nasdaq Composite held up best but still shed 2.47%. U.S. markets will be closed Monday in observance of the Memorial Day holiday.
After a relatively quiet start to the week, stock indexes took a sharp turn lower on Wednesday afternoon, alongside U.S. Treasuries, following a weaker-than-expected auction of 20-year Treasury bonds, which pushed longer-term yields higher and saw the 30-year yield hit its highest level since 2023, though Treasuries across most maturities recovered some ground by the end of the week. (Bond prices and yields move in opposite directions.) The weak auction and subsequent move in yields was partially attributed to credit rating agency Moody’s downgrade of U.S. sovereign debt at the end of the prior week amid concerns about rising U.S. federal debt and fiscal deficits. This appeared to be amplified later in the week after the House of Representatives passed President Donald Trump’s tax bill, which some believe could increase federal debt considerably over the next several years.
Equities continued to slide on Friday after President Trump announced plans to impose a 50% tariff on imports from the European Union, effective June 1, stating that trade talks are “going nowhere.” His announcement also included a threat of 25% tariffs on iPhones unless Apple moves production of the product to the U.S., sending shares of the consumer technology giant more than 3% lower on Friday.
After hitting a 16-month low in April, U.S. business activity growth rebounded in May, according to S&P Global’s Flash Purchasing Managers’ Index (PMI) survey data. Activity in the services sector improved from a 17-month low in April, jumping from a PMI reading of 50.8 to 52.3 in May (readings above 50 signal expansion, while readings below 50 indicate contraction). The Manufacturing PMI also improved, increasing from 50.2 in April to a 3-month high of 52.3 in May. Both readings were better than consensus estimates.
While future sentiment among businesses remained subdued, it improved from April’s two-and-a-half year low to the highest level since January, “buoyed in part by reduced trade worries following the pause on additional tariffs and accompanying improved economic growth prospects.” However, the report also noted that prices rose at the fastest rate since August 2022, which was “overwhelmingly linked to tariffs,” while export orders fell and “supply chain delays intensified.” Chris Williamson, chief business economist at S&P Global Market Intelligence, also noted that “at least some of the upturn in May can be linked to companies and their customers seeking to front-run further possible tariff-related issues."
Elsewhere, the National Association of Realtors (NAR) reported that existing home sales unexpectedly fell to a seasonally adjusted annual rate of 4 million in April, down 0.5% from March and the lowest April reading since 2009, while the median sales price rose to $414,000, the 22nd consecutive month of year-over-year price increases. According to NAR Chief Economist Lawrence Yun, "Pent-up housing demand continues to grow, though not realized. Any meaningful decline in mortgage rates will help release this demand." Meanwhile, average 30-year mortgage rates climbed to the highest level since mid-February during the week, according to data from Freddie Mac.
In other housing market news, the Census Bureau reported Friday morning that new home sales jumped to a seasonally adjusted annual rate of 743,000 in April, up from March’s reading of 670,000 and well ahead of consensus estimates for 690,000. The median sales price declined to $407,200, down 2% year-over-year.
Index | Friday’s Close | Week’s Change | % Change YTD |
---|---|---|---|
DJIA | 41,603.07 | -1,051.67 | -2.21% |
S&P 500 | 5,802.82 | -155.56 | -1.34% |
Nasdaq Composite | 18,737.21 | -473.90 | -2.97% |
S&P MidCap 400 | 2,977.59 | -110.63 | -4.59% |
Russell 2000 | 2,039.85 | -73.40 | -8.53% |
This chart is for illustrative purposes only and does not represent the performance of any specific security.
Past performance cannot guarantee future results.
Source of data: Reuters, obtained through Yahoo! Finance and Bloomberg. Closing data as of 4 p.m. ET. The Dow Jones Industrial Average, the Standard & Poor’s 500 Stock Index of blue chip stocks, the Standard & Poor’s MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments of the U.S. equity markets by market capitalization. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock exchange and the National Market System. Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price’s presentation thereof.
In local currency terms, the pan-European STOXX Europe 600 Index ended 0.75% lower, snapping five weeks of gains, after U.S. President Donald Trump said he would recommend a 50% tariff on goods from the European Union. Major stock indexes also declined. Germany’s DAX fell 0.58%, France’s CAC 40 Index dropped 1.93%, and Italy’s FTSE MIB lost 2.90%. The UK’s FTSE 100 Index, however, gained 0.38%.
Business activity in the euro area unexpectedly contracted in May, as the service sector experienced a sharp deterioration, according to purchasing managers’ surveys compiled by S&P Global. The HCOB Eurozone Composite PMI fell to 49.5 from 50.4 in April, according to a preliminary estimate. (PMI readings below 50 indicate a contraction.) Business activity shrank in Germany, while French output shrank for a ninth consecutive month.
The European Commission (EC) reduced its forecast for economic growth in 2025 to 0.9% from the 1.3% it had projected in late 2024. The downward revision reflected rising tariffs and uncertainty surrounding U.S. trade policy. The commission’s latest estimates call for inflation to hit the European Central Bank’s 2% target by mid-2025, earlier than previously expected.
The German economy expanded in the first quarter by 0.4% sequentially, double the initial estimate and a rebound from the 0.2% contraction it registered in the final three months of last year. Stronger household consumption, fixed investments, and net trade drove the fastest pickup in German economic growth since the third quarter of 2022.
Higher utilities and housing prices boosted the UK’s annual inflation rate to 3.5% in April—the highest level since January 2024—from 2.6% in March. Analysts polled by FactSet had expected an increase to 3.3%. Separately, retail sales rose 1.2% in April from the prior month and 5.0% year over year, coming in well above expectations. Consumer confidence also improved in May, albeit from low levels, according to surveys from GfK and the British Retail Consortium.
However, private sector activity contracted for a second consecutive month in May, according to purchasing managers’ surveys. A small expansion in services was offset by a sharp deterioration in the manufacturing sector.
Japan’s stock markets posted losses over the week, with the Nikkei 225 Index falling 1.57% and the broader TOPIX Index down 0.18%, as markets increased bets on more monetary policy tightening by the Bank of Japan following hotter inflation data. Meanwhile, lead trade negotiator Ryosei Akazawa reportedly reiterated the government’s position in lobbying the U.S. for broader tariff exemptions as he prepared to leave for Washington for a third round of trade talks.
The yield on the 10-year Japanese government bond rose to 1.55% from 1.46% at the end of the previous week, near the highest level since 2008, on rate-hike expectations. The stronger inflation data also pushed the Japanese yen to 143.6 versus the U.S. dollar, the strongest level in over two weeks. Concerns over the U.S. fiscal outlook underpinned the gain as well. Separately, Finance Minister Katsunobu Katō said earlier in the week that he did not discuss exchange rate levels with U.S. Treasury Secretary Scott Bessent at the G7 meetings in Canada, aiming apparently to dampen speculation of coordinated currency intervention.
While headline annual inflation remained unchanged at 3.6% in April, core inflation accelerated to 3.5%—the highest reading in over two years. The data reinforced the view that inflationary pressures are becoming more entrenched. Japan’s core machinery orders—a leading indicator of capital spending—climbed 13% in March, beating market expectations for a drop of 1.6% and registering the strongest reading in almost two decades. Still, broader economic signals remained mixed. The au Jibun Bank Japan purchasing managers’ surveys indicated manufacturing activity continued to shrink, and services sector growth slowed in May amid weaker demand and rising uncertainty about U.S. tariffs.
Mainland Chinese stock markets declined as attention turned back to the economy after Beijing and Washington struck a temporary trade truce. The onshore benchmark CSI 300 Index shed 0.18% and the Shanghai Composite Index eased 0.57% in local currency terms, according to FactSet. In Hong Kong, the benchmark Hang Seng Index added 1.10%.
A trio of indicators offered the first glimpse of China’s economy following the rapid escalation of trade tensions with the U.S. Industrial output rose a better-than-expected 6.1% in April from a year ago. But retail sales growth, a key consumption barometer, weakened to 5.1% from March’s 5.9% increase, lagging economists’ forecasts. Fixed asset investment—which includes property and infrastructure investment—rose 4% from January to April, trailing estimates, weighed by a steep contraction in property investment.
The surprising uptick in industrial production suggested that China was able to avert a significant slowdown at the start of the U.S.-sparked trade war in April. However, the decline in retail sales growth supported the view of many economists that Beijing needs to roll out more spending incentives to bolster consumer confidence. T. Rowe Price economists believe that China should have the financial firepower to reduce the impact of U.S. tariffs and could roll out fiscal stimulus in stages as the government assesses their impact on the economy.
On Sunday, May 18, Bucharest’s mayor, Nicușor Dan, made a massive comeback in the second round of the country’s Presidential election, defeating far-right candidate George Simion with 53% of the votes. Simion initially tried to contest the result, but he later conceded.
According to T. Rowe Price associate portfolio manager and credit analyst Ivan Morozov, the second-round result shows that Romanian society demonstrated a strong sense of consolidation against a political shift to the far right. However, he believes that the election result is just a first step on a very narrow path toward economic stability. Romania seems likely to have a minority government, which may not be particularly stable, and lawmakers will need to turn their attention to the fiscal situation almost immediately. Unless the government in the next couple of months can pass legislation that aims to put Romania’s budget deficit on a sustainable path toward the European Union limit of 3% of gross domestic product, Morozov believes there is a possibility that major credit rating agencies will downgrade Romanian sovereign debt by the end of the year.
Late last week, the Mexican central bank held its scheduled policy meeting and reduced its key interest rate, the overnight interbank interest rate, by 50 basis points (0.50%), from 9.00% to 8.50%. The decision, which was generally expected, was unanimous among policymakers.
According to the post-meeting statement, policymakers noted that global growth prospects, “particularly those for the U.S. economy, have been revised downwards.” They identified several global risks, such as “escalating trade tensions along with the intensification of geopolitical turmoil and their possible impact on inflation, on economic activity, and on volatility in financial markets.”
As for Mexico, central bank officials noted that the economy “exhibited weakness again during the first quarter” with a growth rate of only 0.2% on the heels of a fourth-quarter contraction. They affirmed that the “environment of uncertainty and trade tensions poses significant downward risks.” Headline and core inflation were measured at 3.93% in April, and policymakers noted that core inflation “accumulated” below 4.00% for eight consecutive months. While they felt that the balance of risks for inflation remained biased to the upside, they also felt that it has improved as “global shocks have been fading.”
The decision to reduce the benchmark interest rate by 50 basis points was made with consideration of “the current inflationary outlook and the prevailing level of monetary restriction.” As for possible future rate cuts, policymakers stated that they could “continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes.” However, even if they implement additional 50-basis-point rate cuts, they intend to maintain a “restrictive stance” to help bring headline inflation down to their 3% target.
Review the performance of global stock and bond markets over the past week, along with relevant insights from T. Rowe Price economists and investment professionals.
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