The Davy Digest - 26th May 2025

Government bond yields continued to move higher last week, driven by Moody’s downgrade of the US credit rating and by the $16 billion auction of 20-year Treasury bonds that produced lacklustre results. Persistent concerns over the US fiscal outlook pushed the 30-year yield above 5%. This development weighed heavily on equity markets, along with President Trump’s threat to impose 50% tariffs on EU goods (now postponed until the 9th of July). In terms of data releases for the US, preliminary flash PMIs for May suggest a rebound in business confidence. Both manufacturing and service PMI readings rose to 52.3, showing an uptick in activity growth from April's 19-month low. Meanwhile in the Eurozone, flash PMI data was mixed. Manufacturing PMI data unexpectedly improved, while services PMI dropped. UK inflation surged more than expected to 3.5% in April, driven by higher energy costs. British retail sales rose by 1.2% month-on-month in April, significantly beating expectations of a 0.2% rise. UK flash PMIs were also mixed as manufacturing PMI data fell short of expectations, but with services PMI increasing from April’s reading. Meanwhile in China, industrial production slowed to 6.6% year-on-year in April, above expectations but below the previous month’s reading. Retail sales also softened due to weak domestic demand and trade war challenges. The People’s Bank of China cut its benchmark lending rates for the first time since October in hopes to boost its economy.

Last week's highlights

	S&P Global Manufacturing PMI (22/05) – Rose to 52.3 in May vs previous 50.2. S&P Global Services PMI (22/05) – Rose to 52.3 in May vs previous 50.8.
	Eurozone HCOB Manufacturing PMI (22/05) – Increased to 49.4 in May vs previous 49. Eurozone HCOB Services PMI (22/05) – Dropped to 48.9 in May vs previous 50.1.
	UK CPI (21/05) - Jumped to 3.5% in April, vs previous 2.6%. UK S&P Global Manufacturing PMI (22/05) – Dropped to 45.1 in May vs previous 45.4. UK Retail Sales (23/05) – Increased 1.2% in April, beating expectations.
	China Industrial Production (19/05) – Rose 6.1% year-on-year, beating expectations. China Retail Sales (19/05) – Rose 5.1% year-on-year, below expectations. People’s Bank of China meeting (20/05) – Cut benchmark lending rates for the first time in seven months.

This week, the Federal Open Market Committee (FOMC) minutes will be released on Wednesday, followed by Q1 GDP for the US on Thursday and data on Core PCE on Friday. The Eurozone will see consumer confidence figures for May on Tuesday. Meanwhile in the UK, the Bank of England’s Lombardelli will make a speech on Wednesday. Tokyo CPI will be released Thursday, while finally, investors will see data on China’s manufacturing and non-manufacturing PMIs towards the end of the week.

What's on the radar

	FOMC Minutes (28/05) Q1 GDP (29/05) Core Personal Consumption Expenditures (30/05)
	Consumer Confidence (27/05)
	BoE's Lombardelli speech (28/05)
	Tokyo CPI (29/05) China NBS Manufacturing PMI (31/05) China NBS Non-Manufacturing PMI (31/05)

Chart of the moment

Bad Mood(y’s)

Source: Bloomberg, Davy as of 22/05/2025

• Last Monday, yields on US Treasuries surged past 5%, their highest level since October 2023. This level of borrowing cost surpassed last month's tariff driven peak.
• The rise in borrowing costs came after Moody's downgrading of the US's triple A Sovereign credit rating. Moody's highlighted the increasing levels of government debt and widening budget deficit.
• The $16bn 20-year US bond auction on Wednesday evening saw weaker than expected demand, forcing the government to offer higher yields to attract buyers.
• Investors are keeping an eye on President Trump’s budget bill, as the bill risks adding trillions to the US deficit, at a time when concerns over inflation are already pressuring bond markets and driving yields higher.