Market Watch: May 23, 2025

U.S. equity markets began the week on a cautious note, initially buoyed by resilient Purchasing Manager Index (PMI) data and easing jobless claims, but sentiment deteriorated midweek as Moody’s downgraded the U.S. credit rating and President Trump’s tax bill reignited fiscal concerns, culminating in a sharp selloff Friday after surprise tariff announcements targeting the EU and Apple. In Canada, markets were closed Monday, but inflation data on Tuesday showed sticky core pressures, prompting a repricing of rate cut expectations and weighing on equities, while disappointing core retail sales on Friday added to concerns about consumer resilience. European equities tracked U.S. losses, pressured by weak PMIs and hotter-than-expected U.K. inflation, which led to a pullback in Bank of England (BoE) rate cut expectations. In China and broader emerging markets, sentiment was initially lifted by policy easing and rate cuts, but gains faded as global risk aversion intensified late in the week.

Highlights:

U.S. markets returned -2.58%¹ after a volatile week of trading as early optimism from strong PMI data and falling jobless claims gave way to concerns over fiscal sustainability following Moody’s credit downgrade and renewed tariff threats.
Canadian markets returned -0.02%² after hotter-than-expected core inflation reduced rate cut expectations, while weak core retail sales and downward revisions to prior data raised concerns about consumer strength which weighed on sentiment.
European markets returned 1.21%³ for the week as disappointing PMI data signaled renewed economic contraction, while hotter UK inflation and hawkish BoE repricing added pressure; late-week U.S. tariff threats further dampened risk appetite across the region.
Emerging markets closed 0.89%⁴, initially gaining on central bank easing and lending rate cuts, but momentum faded as global risk aversion intensified midweek, with esvalating U.S. trade tensions and weak global demand clouding the outlook.

Bond markets signal concern as U.S. moves to sharply increase deficit

U.S. fixed income markets saw yields rise early in the week as resilient PMI data and sticky inflation signaled persistent price pressures, while Moody’s credit downgrade and Trump’s expansive tax bill raised fiscal concerns, steepening the curve. In Canada, bond markets underperformed amid hotter-than-expected core Consumer Price Index (CPI) and firm services inflation, which prompted a repricing of rate cut expectations. European yields initially climbed on stronger U.K. inflation data, which pushed back BoE easing expectations, but later retreated as soft PMIs and dovish European Central Bank (ECB) minutes reinforced the case for June rate cuts. In emerging markets, Chinese rate cuts and deposit easing supported local bonds early on, though global risk-off sentiment and renewed U.S. tariff threats pressured yields higher by week’s end.

Highlights:

The 2- and 10-year U.S. Treasury yields rose by 3 basis points (bps) and 10 bps, respectively. In Canada, the 2- and 10-year yields were up 17 bps and 23 bps, respectively. Bond yields and prices move inversely to one another.
President Trump’s tax bill is heading to the U.S. Senate after narrowly passing in the House. The bill includes a USD$4.0 trillion increase to the U.S. debt ceiling and would extend Trump’s first-term tax cuts, along with new tax relief, but would also add hundreds of billions a year to the deficit.
Credit spreads widened for the week following a selloff in risky assets. High yield bonds sold off as both rates and spread moved higher, underperforming amid rising yields and wider credit premiums.

Weekly dashboard

Canada’s core inflation surprises to the upside as headline CPI falls, complicating BoC outlook

Canada’s April CPI report showed a notable divergence between headline and core inflation trends, complicating the policy outlook for the Bank of Canada. While headline inflation slowed sharply due to falling energy prices—particularly gasoline—core inflation measures, which the BoC closely monitors, accelerated. This divergence led markets to scale back expectations for near-term rate cuts, as persistent services inflation and early signs of tariff-related pressures suggest underlying price stability remains elusive. The data reinforced a cautious stance from policymakers, with expectations for further easing now pushed into 2026.

Highlights:

Headline CPI slowed to 1.7% year-over-year (YoY) in April, down from 2.3% in March, driven by a 10.2% month-over-month (MoM) drop in gasoline prices.
Core CPI median and trim rose to 3.2% and 3.1% YoY respectively, both above consensus expectations.
The BoC’s preferred 3-month rolling average of core inflation accelerated to 3.4% annualized, above the 2% target band.

U.S. jobless claims fall but labour market signals mixed amid rising cost pressures

Initial jobless claims in the U.S. fell to a four-week low, suggesting continued resilience in the labour market despite growing macroeconomic uncertainty. However, underlying data from May’s PMI report pointed to softening employment demand, with hiring activity slipping below expansionary levels for the first time since January. Rising input costs and output charges also signaled renewed inflationary pressures, potentially complicating the Federal Reserve’s (Fed) policy path. While the headline claims figure supports a stable jobs picture, broader indicators hint at emerging cracks in labour demand and business sentiment.

Highlights:

Initial jobless claims dropped to 227,000, the lowest in four weeks.
May PMI employment index fell below 50, indicating contraction in hiring.
Input prices and output charges rose to their highest levels since late 2022.

Eurozone PMIs slide back into contraction, undermining growth outlook

Eurozone PMI data for May revealed a renewed downturn in economic activity, with the composite index falling below the 50 threshold, signaling contraction. The decline was driven primarily by a sharp drop in services activity, particularly in Germany, where services PMI hit a 30-month low. While manufacturing showed marginal improvement, it remained in contractionary territory, with some temporary support from tariff-related frontloading. The weak data reinforced expectations for ECB easing, as soft domestic demand and rising uncertainty continue to weigh on the region’s recovery prospects.

Highlights:

Eurozone composite PMI fell to 49.5, a six-month low, from 50.4 in April.
Services PMI dropped to 48.9, with Germany’s services index plunging to 47.2.
ECB minutes highlighted concern over U.S. tariffs, supporting expectations for a June rate cut.

^{1 S&P 500 Index CAD}
^{2 S&P/TSX Composite Index CAD}
^{3 Bloomberg Developed Markets ex N. America Large & Mid Cap Price Return Index CAD}
^{4 Bloomberg EM Large & Mid Cap Price Return Index CAD}

by Scotia Wealth Management - The Zukiwsky Group

Market Watch: May 23, 2025

Week in review

Equity markets flat-to-down as U.S. reignites trade tensions and advances the “Big Beautiful Bill”

Bond markets signal concern as U.S. moves to sharply increase deficit

Weekly dashboard

Canada’s core inflation surprises to the upside as headline CPI falls, complicating BoC outlook

U.S. jobless claims fall but labour market signals mixed amid rising cost pressures

Eurozone PMIs slide back into contraction, undermining growth outlook

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