The Davy Digest - 19th May 2025

In a significant policy shift, the US reduced tariffs on Chinese goods from 145% to 30% for a 90-day period, with Beijing announcing its own set of tariff reductions on American goods. This unexpected news came as a surprise to markets, as US recession concerns notably eased and the S&P500 finished up over 2.5% for the week. US inflation ticked down to 2.3% in April, however economists do expect prices to rise later this year, as the effects of Trump’s tariffs loom over the economy. US retail sales rose by 0.1% month-on-month in April following a 1.5% increase in March, suggesting a spending slowdown. US consumer sentiment fell to 50.8 in May, down from 52.2 in April, marking the second-lowest level ever recorded. Meanwhile in Europe, Germany inflation eased further to 2.2% year-on-year in April, and the Eurozone economy grew 0.4% in Q1 2025, doubling the previous quarter's pace and beating forecasts. UK unemployment edged higher to 4.5% in the three months to March after reporting 4.4% in the quarter to February. UK GDP was stronger than expected after a 0.7% increase quarter-on-quarter, beating expectations. According to the Office for National Statistics (ONS), the expansion was largely influenced by a rebound in the services sector and an increase in investment. Japan GDP shrank 0.2% in the March quarter, driven by weak consumption and higher imports.

Last week's highlights

	US Inflation (CPI) (13/05) – Fell to 2.3% in April from previous 2.4%. US Retail Sales (15/05) – Rose 0.1% month-on-month. US Producer Price Index (15/05) – Softens to 2.4% in April, below expectations. Michigan Consumer Sentiment (16/05) – Dropped to 50.8 in May, down from 52.2.
	Germany Inflation (14/05) – Eased further to 2.2% in April. Eurozone Q1 GDP (15/05) – Rose 0.4% quarter-on-quarter vs 0.2% estimate.
	UK Unemployment (13/05) – Rose to 4.5% in the quarter to March, up from the previous 4.4%. UK Q1 GDP (15/05) – Rose 0.7% quarter-on-quarter, beating expectations.
	Japan Q1 GDP (15/05) – Shrank 0.2% quarter-on-quarter, down from a previous 0.6%.

This week, investors will receive Manufacturing & Services PMI figures for the US, Eurozone and the UK. On Monday, the Eurozone inflation figure for April will come through, while the UK will receive its inflation data on Wednesday. Both UK and China retail sales figures for April will come out this week, while the People’s Bank of China will make an interest rate decision on Tuesday.

What's on the radar

	S&P Global Manufacturing & Services PMI (22/05)
	Eurozone Inflation (19/05) Eurozone HCOB Manufacturing & Services PMI (22/05)
	UK CPI (21/05) UK S&P Global/CIPS Manufacturing & Services PMI (22/05) UK Retail Sales (23/05)
	China Industrial Production (19/05) China Retail Sales (19/05) People’s Bank of China meeting (20/05)

Chart of the moment

Greenbacks against the wall

Source: Bloomberg, Davy as of 14/05/2025.

Note: 1-Year Yield Differential = 1-year German government bill minus 1-year US T-bill.

• Under typical market conditions, currency valuations are closely tied to interest rate differentials. Higher policy rates tend to attract yield-seeking capital inflows. 
• This relationship has broken down recently. Since the trade war started, the dollar is now being influenced by factors beyond interest rate spreads. The dislocation in the data suggests that EUR/USD should be trading closer to parity. In effect, the dollar is currently about 10% weaker than what interest rate differentials would imply.