Global Markets Weekly Update

U.S.

Stocks rally on U.S.-China tariff suspension

U.S. equities posted strong gains for the week, with positive sentiment largely driven by news that the U.S. and China had agreed to a substantial de-escalation of trade tensions following talks in Switzerland over the weekend. The Nasdaq Composite led the way for major indexes, advancing 7.15%, while the S&P 500 Index and Dow Jones Industrial Average gained 5.27% and 3.41%, respectively. The S&P MidCap 400 Index and Russell 2000 Index notched positive returns for the sixth straight week.

The agreement between the world’s two largest economies will see most of their recently implemented tariffs suspended for 90 days while further trade negotiations continue, which will bring U.S. tariffs on most Chinese goods down from 145% to 30%, while China’s levies on U.S. imports will drop from 125% to 10%. Several other trade-related headlines—including news of an agreement that will allow Saudi Arabia to purchase large amounts of advanced artificial intelligence chips from U.S. companies—appeared to help fuel the positive move in stocks during the week, putting most indexes firmly back above their April 2 levels by Friday’s close.  

Inflation cools in April

Monday’s tariff-suspension-driven rally continued through Tuesday, supported by the Bureau of Labor Statistics’ (BLS) report of lower-than-expected consumer price inflation in April. According to the report, April’s consumer price index (CPI) rose 2.3% year-over-year, a tick below consensus estimates for a 2.4% increase and the slowest annual pace since early 2021, before inflation began to surge and the Federal Reserve started its rate-hiking cycle. On a month-over-month basis, both the headline and core (excluding food and energy) CPI rose 0.2%, below estimates for 0.3% increases.

The BLS also reported an unexpected decline in its producer price index (PPI), which measures inflation at the wholesale level. On Thursday, the BLS reported that its PPI reading for April dropped 0.5% from March compared with estimates for a 0.2% rise. Notably, the report showed that a significant portion of the drop in April was attributable to declining margins, which could indicate that companies have thus far been absorbing some of the costs of higher tariffs.

Retail sales growth decelerates in April; consumer sentiment continues to slide

Elsewhere, the Census Bureau reported Thursday that retail sales grew just 0.1% in April, a notable decline from March’s gain of 1.7%. The report reflected a pullback in spending across several categories that surged in March, including sales at motor vehicle and auto parts dealers, sporting goods, and apparel, which could indicate that consumers were tempering their spending following a rush to buy goods in March ahead of broad tariff increases.

The week’s economic calendar wrapped up on Friday with the preliminary reading of the University of Michigan’s Index of Consumer Sentiment, which declined for a fifth consecutive month in May to 50.8, down from 52.2 in April. “Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60% in April; uncertainty over trade policy continues to dominate consumers’ thinking about the economy,” according to Surveys of Consumers Director Joanne Hsu. Expectations for inflation in the year ahead jumped to 7.3%, up from 6.5% in April.

Investment-grade and high yield bonds outperform Treasuries amid positive trade news

U.S. Treasury yields fluctuated throughout the week in response to various economic data reports, though yields across most maturities were generally higher heading into Friday morning, leading to negative returns for the asset class. (Bond prices and yields move in opposite directions.) Municipal bonds outperformed Treasuries, although weakness in the Treasury market and a heavy issuance calendar weighed on the sector by the end of the week, leading to modestly negative returns through Thursday.

Meanwhile, investment-grade corporate bonds posted modest gains, outperforming Treasuries in the risk-on environment. High yield bonds also traded higher as equities rallied on encouraging trade headlines, and T. Rowe Price traders noted that the new deals that priced during the week were met with solid demand.

Europe

In local currency terms, the pan-European STOXX Europe 600 Index ended 2.10% higher, as sentiment improved after a de-escalation in the trade war between the U.S. and China. Major European indices also rose. Germany’s DAX added 1.14%, France’s CAC 40 Index gained 1.85%, and Italy’s FTSE MIB climbed 3.27%. The UK’s FTSE 100 Index tacked on 1.52%.

UK economy grows at fastest pace in a year; labor market loosens

Britain’s economy grew at a faster pace ahead of the imposition of U.S. tariffs on April 2. Gross domestic product (GDP) in the first quarter expanded 0.7% sequentially, more than the 0.6% forecast in a Reuters poll and up from 0.1% in the final three months of 2024. Strong increases in services, investment, and exports drove the expansion.

Meanwhile, the Office for National Statistics reported that the labor market cooled at the start of the year. The unemployment rate, based on the labor force survey that is being overhauled, rose to 4.5% from 4.4% in the three months through March. The number of payrolled employees fell the most in a year between February and April, tax office data showed. Private sector wages, excluding bonuses—a gauge of underlying inflation pressure monitored by the Bank of England (BoE)—rose in the January–March period by 5.6% from year-ago levels, the smallest increase since the three months through November 2024.

BoE’s Pill says inflation still a threat; other policymakers urge caution

BoE Chief Economist Huw Pill said that inflation in Britain could prove stronger than the central bank expects and that interest rates might need to stay higher than investors think. At a BoE conference, policymakers Clare Lombardelli and Megan Greene, who voted to cut rates at the central bank’s last meeting, highlighted persistent inflationary pressures in the labor market and urged caution on cutting rates further without more evidence that inflation was receding.

Eurozone industry output, trade, and employment strengthen

Industrial production in the euro area jumped in March, suggesting that the sector is emerging from a two-year recession. Strong increases in capital goods and durable consumer goods drove monthly expansion of 2.6%, exceeding February’s 1.1% increase. Germany’s industrial output surged 3.1%. Also, the eurozone’s trade surplus swelled to a record EUR 36.8 billion in March, from EUR 22.8 billion a year earlier, fueled by a sharp rise in exports, particularly to the U.S. Employment rose by 0.3% in the first quarter, accelerating from 0.1% in the previous period.

Japan

Japan’s stock markets registered modest gains over the week, with the Nikkei 225 Index rising 0.67% and the broader TOPIX Index up 0.25%. A de-escalation in the U.S.-China trade dispute, with both countries agreeing to substantially reduce tariffs, albeit temporarily, helped lift sentiment. Amid ongoing trade negotiations between Japan and the U.S., Japan continued to push for a review of all tariff measures imposed by the U.S., calling for a reassessment of duties on autos and other goods.

The yield on the 10-year Japanese government bond (JGB) rose to 1.46%, from 1.35% at the end of the previous week, as progress in U.S.-China trade negotiations dampened demand for assets perceived as safer. While the yen weakened considerably on the week’s first trading day on waning safe-haven demand, it strengthened over the rest of the week, leaving it in the low JPY 145 range against the U.S. dollar, broadly unchanged from the prior week. This was amid a broader rally in Asian currencies, which some attributed to speculation that the U.S. could advocate for a weaker dollar as part of its ongoing trade negotiations.

GDP growth lags expectations

Japan’s economy contracted by more than expected in the first quarter of 2025, with gross domestic product (GDP) falling an annualized 0.7% quarter on quarter (q/q), versus consensus estimates of a 0.2% q/q decline and following a 2.4% q/q expansion in the fourth quarter of 2024. The contraction, which marked the first decline in a year, owed much to sluggish private consumption, as well as concerns about the potential impacts of U.S. trade tensions and weak demand from Japan’s trading partners, notably China. The Bank of Japan recently downgraded its economic growth and inflation forecasts, citing tariff developments. The central bank’s core stance remains that it will raise interest rates if the economy and prices develop in line with its forecasts.

China

Mainland Chinese stock markets rose for the week after news of the de-escalation in U.S. trade tensions. The onshore benchmark CSI 300 Index rose 1.12% and the Shanghai Composite Index edged up 0.76% in local currency terms, according to FactSet. In Hong Kong, the benchmark Hang Seng Index advanced 2.09%.

Chinese stocks rallied early in the week after the outcome of tariff negotiations with the U.S. last weekend. The deal with the U.S., which called for both sides to temporarily lower tariffs on each other’s imports, exceeded expectations in China and ended up meeting nearly all of Beijing’s core demands. However, stocks pared their gains starting on Wednesday as a more favorable tariff outlook dimmed hopes for a substantial stimulus package from Beijing.

Expectations that a spiraling trade war with the U.S. would spur the government to ramp up measures to bolster the economy have supported Chinese stocks in recent weeks. Earlier in May, the People’s Bank of China unexpectedly cut its reserve requirement ratio—the amount of cash that banks must keep in reserve—by half a percentage point and trimmed the seven-day reverse repurchase rate by 10 basis points to 1.4%. However, hopes for further government support have been tempered in the near term as the U.S. and China work toward a broader agreement over the next three months.

Other Key Markets

Hungary

Morozov believes inflation data mask real price pressures; rate cuts unlikely this year

Late last week, the Hungarian government reported that year-over-year inflation in April was 4.2%. While this was lower than the 4.7% year-over-year reading for March, it was higher than expected.

According to T. Rowe Price associate portfolio manager and credit analyst Ivan Morozov, the month-over-month decline in inflation was driven by food prices, as the government introduced price caps on a number of food items; more are expected in May. Outside of food items, Morozov perceives signs of a small acceleration in core prices. He believes that the latest inflation data mask real inflation pressures in the economy to some degree. As a result, he believes it is increasingly unlikely that the central bank will reduce short-term interest rates later this year. 

Brazil

No sign yet of core disinflation in April data

Also late last week, Brazil’s government reported that inflation in April increased at a month-over-month rate of 0.43%. This was marginally above consensus expectations for 0.42%. The year-over-year inflation rate was measured at 5.6%.

According to T. Rowe Price analysts, the underlying details of the report were mildly worse than expected, as lower-than-expected non-core gasoline and airfare prices offset slightly higher-than-anticipated core inflation. However, the latest reading is not that different from recent inflation reports, which showed some non-core disinflation, but no sign yet of core disinflation to go with an incipient slowdown in economic activity stemming from several interest rate increases since September.