Interest Rate & Market Commentary for Week Ending 9th May 2025
Overview of the US Equities Market
High Stakes? Well its happening at Geneva. Meanwhile, the Fed is not really sure where tariffs are going to land. They are stuck. The Fed is on ice. They really can’t do anything and is likely to just take a step back. They’re worried about the stagflationary risk. The recessionary risk is still 60%. The question is how long the hard data can hold up.
Wall Street ended the week on a more cautious note, with stocks and bonds fluctuating as the world’s two largest economies got ready to kickstart their trade negotiations. Over the course of the week, the S&P 500 was down 0.5%, the Nasdaq 100 down 0.2%, and the Dow Jones Industrial Average down a similar 0.16%. The US 10-yield creeped a tad higher, but the 2-year slipped, and the curve steepened even more. And why wouldn’t it. And what happens in the US at the moment happens in Australia.
The S&P ASX 200 Index ended flat. On fixed income, Australian markets continue to price in a 25bps rate cut by the Reserve Bank of Australia at its upcoming meeting on May 20th, amid signs of easing inflation and weaker consumer spending. Investors are also anticipating further cuts in July and August, taking rates to a floor of 3.25%, with some expectations that it could fall to 3.0% or below by year-end.
The US yield curve continued to steepen. With the expectation of a slowing economy and the Fed potentially cutting rates this year, you saw the lower end of the yield curve, the shorter end being driven down, but decoupling from that was the longer end. In fact, if you look at the 10 year the market is actually more than 20bps higher this the beginning of April. Even this week, despite the treasury secretary heading over to Beverly Hills (Milken Conference) talking to investors and trying to create some calm in that market, we’ve still seen a little bit of a sell off.
The Treasury market had a liquidity scare – but there is still a wall of money for corporate bonds. The technicals are not only strong – they are stronger than they have been. Most of the issuance in the last few years has been refinancing. Meaning? The high yield market has not expanded, yet there, mainly on account of ETF growth – money coming in. The consequence? Spreads remain tight, and in actual fact, they are too tight for the economic risks. Once upon a time, you could look at the bond market as a reliable guide.
Looking at the odds of a Fed rate cut in July – that tapered this week. A week ago we were at four cuts this year, now we are at 2.7. We’d call it three. Bond managers are really only buying the 5-year. Apart from everything else, the volatility at the long-end has hardly been ‘safe haven’.
By Friday, investors refrained from making riskier bets on speculation that while discussions between Chinese and American officials could represent a diplomatic icebreaker, a comprehensive commitment would only come to fruition after several rounds of talks. That was in contrast to Thursday, when Trump announced an agreement with the UK.
On Thursday, it was Buy on Dips, Sell on Rips. Because that is the Moniker. A Trader’s Market?. Is this nothing but a fool’s rally? Happy Friendshoring? So, the UK sets an agreement. And a risk-on wave enveloped Wall Street.
The steep recovery in equities over the past two weeks is typical of bear-market rallies, and the erratic swings mean almost every investor will experience pain whichever direction the market suddenly moves. Following a historic winning run for stocks, Goldman Sachs Group Inc. strategists say current valuations leave little room for the recent rally to continue. For JPMorgan Chase & Co. strategists, US assets are “not a good place to hide.” At HSBC, Max Kettner remains tactically cautious as “fundamentals remain dire.” So, what are we left with? Despite that sage advice, where else is the market going. It’s not a problem until it becomes a problem. Well, I’m not the marginal buyer. Watch the Dollar and Watch the Bond Market.
Let’s be honest. If you know what’s going on in the markets, then you’re the only one. Not Public Markets. Not private Markets. I don’t see safety.
Here’s a Bullish View. During 2022, 2023, and 2024, most economists and investment strategists expected that the dramatic tightening of monetary policy would cause a recession. They observed that the inverting yield curve and the falling Index of Leading Economic Indicators were confirming this outlook. That recession was the most widely anticipated recession of all times. It could be back in 2025. This time, the cause of the widely anticipated downturn is Trump’s Tariff Turmoil.
The odds then shot up dramatically, especially after April 2 (“Liberation Day”), reaching 64% on April 8. They fluctuated around 55% after Trump postponed for 90 days the reciprocal tariffs that he had announced on April 2 for all countries with one notable exception: China’s tariff remained 145%. The odds of a recession rose to 66% on May 1 following last week’s batch of weak economic indicators (i.e., consumer confidence, ADP payrolls, M-PMI, and jobless claims). The odds fell to 60% on Friday, May 2, following the release of a stronger-than-expected employment report for April.
Lowering odds of a recession: China and the US both may be ready to suspend their tariffs on each other while they negotiate a trade deal. In other words, both sides may be starting to blink. Neither side can bear the pain of a trade war, which might be more painful for China’s economy than America’s economy. On the other hand, Americans have less tolerance for pain than the Chinese
Trump will likely declare victory in his trade war with the rest of the world. By the end of the 90-day postponement period of his Liberation Day reciprocal tariffs, the US is likely to have signed numerous agreements with America’s major trading partners. Stragglers might come around during a second 90-day postponement period. Trump needs to put the trade issue behind him to reduce the odds of a recession, which would harm the Republicans’ chances of holding onto their slim majorities in both houses of Congress.
Trump also needs to get this issue resolved quickly now that numerous court cases have been filed challenging his constitutional authority to impose tariffs under his claim that they are warranted by a national crisis that he declared.
Meanwhile, the Index of Coincident Economic Indicators (CEI) has been rising to new record highs since then through March! Some are betting on the resilience of consumer spending, which has been boosted by the spending of retiring Baby Boomers. We had been concerned recently about the negative wealth effect on consumption because of the drop in stock prices. Some are less concerned given the subsequent rebound in stock prices. Some are also betting on business spending to remain resilient.
Overview of the Australian Equities Market
On Thursday, data showed continued weakness in Australia’s industrial sector in April, with trade and election-related uncertainties weighing heavily on manufacturing, particularly in export-exposed areas.
During the week on Thursday, National Australia Bank surged 1.9% after posting better-than-expected first-half cash earnings. Meanwhile, Macquarie Group rose 0.7% even after regulators launched new enforcement actions against its banking unit over significant compliance breaches.
And on Friday, the S&P/ASX 200 Index rose 0.2% to close at 8,192 on Thursday, extending gains from the previous session as US President Donald Trump hinted at a major trade deal with a “big” country. Subsequently known as the UK. Trump said he would not lower tariffs on China as a condition to begin trade negotiations ahead of US-China talks in Switzerland this weekend. Elsewhere, the US Federal Reserve held interest rates steady, with Fed Chair Jerome Powell signaling a cautious approach and ruling out a preemptive rate cut in response to the potential economic impacts of tariffs. NAB kept rolling (1.4%).
Overview of the US Treasuries Market
Over the course of the week, the yield on the 10-year US Treasury note increased 7bps to 4.39% while the yield on the 2-year US Treasury note was also up 8bps to 3.91%. This week was a reset – a reset on interest rate expectations.
On Friday, treasury yields surged to multi-week highs overnight as traders reduced expectations of a rate reduction at the Fed’s next meeting in June. They now assign a 15% chance of a 25 bps move, compared to about 30% on Tuesday and more than 50% a week ago. Wow, US treasuries – safe harbour??? US corporate bonds, which we will get on to, look like a World of Calm.
We said it last week, and say it again – the term premium remains elevated based on a combination of longer-term fiscal concerns and policy uncertainty. Essentially, bond managers are requiring higher yields on longer maturities, with the term premium at its highest since 2014, and are becoming more cautious in their investments, favouring shorter maturities and limiting their exposure to longer-term bonds. In the new world order, call it the Fear of the Long Bond.
On Thursday, bond traders reset with the Fed, lowering interest rates three times this year despite the central bank leaving borrowing costs on hold and flagging mounting risks of both higher inflation and unemployment. “It’s not a situation where we can be pre-emptive because we actually don’t know what the right response to the data will be until we see more data,” Powell said. The Fed is unlikely to lower the cash rate at its next meeting.
After piling into short-term Treasuries, anticipating the Fed would start easing policy as soon as next month to contain the fallout, they reversed course. Two-year yields shot up, staging the biggest two-day jump since October, and futures traders started pricing in what Fed officials have been consistently trying to drive home — that they will remain in wait-and-see mode until there’s more evidence that the economy has turned. With inflation being above the Fed’s target, tariffs which can move prices higher and a still solid labour market, the Fed is unlikely to do anything. They are data dependent, and the data could turn weaker by the time the Fed meets mid-June.
Re Fig 2, it’d be unwise to dismiss the possibility of a recession. There could still be supply disruptions resulting from the still unresolved trade war with China. Regional and national business surveys show weakening economic activity and rising prices during March and April.
Overview of the Australian Government Bond Market
Over the course of the week, Australia’s 10-year government bond yield rose circa 6 bps to 4.33%. The markets are repricing recession risk.
On the domestic front, markets continue to price in a 25bps rate cut by the Reserve Bank of Australia at its upcoming meeting on May 20th, amid signs of easing inflation and weaker consumer spending. Investors are also anticipating further cuts in July and August, taking rates to a floor of 3.25%, with some expectations that it could fall to 3.0% or below by year-end.
Concluding Remarks
A market that was biding time. And biding for What Geneva delivers. Or doesn’t. There is a wall of money for US and Australian Corporate Bonds. And it has been building for years, mainly on account of private debt – its called eating issuance. Here’s the thing – corporate debt spreads do not reflect the risks to outlook. Now, is that about to change in the foreseeable – unlikely. But be aware.
Charts of the Week and Market Summary
Market Summary Table
| Name | Week Close | Week Change | Week High | Week Low |
|---|---|---|---|---|
| Cash Rate% | 4.1 | |||
| 3m BBSW % | 3.8198 | -0.041 | 3.850 | 3.820 |
| Aust 3y Bond %* | 3.433 | 0.105 | 3.438 | 3.375 |
| Aust 10y Bond %* | 4.304 | 0.139 | 4.337 | 4.253 |
| Aust 30y Bond %* | 4.943 | 0.052 | 5.000 | 4.908 |
| US 2y Bond % | 3.862 | 0.026 | 3.895 | 3.789 |
| US 10y Bond % | 4.377 | 0.021 | 4.382 | 4.308 |
| US 30y Bond % | 4.846 | 0.043 | 4.853 | 4.772 |
| iTraxx | 67 | -5 | 71 | 67 |
| $1AUD/US¢ | 64.44 | 0.47 | 65.06 | 63.84 |
Figure 1: US Equities Sector Performance
Looking Ahead: Major Economic Releases for the Week Ended 9 May
A bunch of sentiment this week, bar US retail sales. A we finally seeing Soft move into Hard data. Watch that read. Tick tock.
Major Economic Releases for the Week ended 2 May, 2025
| Date | Country | Release | Consensus | Prior |
|---|---|---|---|---|
| Tuesday, 13/5 | Australia | Westpac Consumer Sentiment | n/a | 90.1 |
| Tuesday, 13/5 | Australia | NAB Business Survey April | Multiple | Multiple |
| Tuesday, 13/5 | US | NFIB Business Sentiment | n/a | 97.4 |
| Wednesday, 14/5 | Australia | Wage Price Index | 3.20% | 3.20% |
| Thursday, 15/5 | Australia | Labour Force Survey | Multiple | Multiple |
| Thursday, 15/5 | US | Retail Sales | n/a | 1.40% |
| Friday, 16/5 | US | UoMich Consumer Sentiment | n/a | 52.2 |
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