Tarrif tensions and mixed economic data continue to challenge Central Banks

02/06/2025 04:34 AST

In the last week of May 2025, markets experienced heightened volatility amid mixed economic data, influencing global asset classes. WTI crude oil futures dropped over 1 percent, dropping towards $60.3 per barrel, driven by renewed trade fears ahead of an anticipated OPEC+ meeting. US equities faced downward pressure, falling approximately 0.3 percent, after President Trump's accusations against China intensified trade uncertainty.

Concurrently, softening US inflation data reinforced expectations of potential Federal Reserve rate cuts. In currency markets, the Japanese yen advanced toward 142 per dollar, benefiting from heightened safe haven demand due to increasing US fiscal concerns and unpredictable trade policies. Meanwhile, the Australian dollar retreated to roughly $0.643, reflecting risk-off sentiment amid global economic uncertainties and expectations of further easing by the Reserve Bank of Australia, highlighted by persistently soft economic indicators and mixed regional economic data.

FOMC minutes
Minutes from the Federal Reserve's May 6th-7th meeting highlighted elevated risks to the US central bank's dual mandate, with officials warning of the possibility that inflation and unemployment could rise simultaneously. The unemployment rate stood at 4.2 percent in April, and rising inflation remains a concern. The Fed maintained its policy rate at 4.25 percent to 4.50 percent. Meanwhile, the US Court of International Trade ruled that President Donald Trump lacked legal authority to impose sweeping tariffs, including levies on Chinese goods. The administration intends to appeal.

US PCE moderates
The US Personal Consumption Expenditures (PCE) price index increased by 0.1 percent month-over-month in April 2025, matching market expectations. Core PCE, excluding food and energy, also rose 0.1 percent, aligned with forecasts. On an annual basis, headline PCE inflation eased to 2.1 percent, the lowest level in seven months, down from 2.3 percent in March and below the forecast of 2.2 percent. Core inflation similarly moderated to 2.5 percent, marking its lowest since March 2021, highlighting continued easing inflationary pressures. The US Dollar index closed the week at 99.129.

Canadian outpaces expectations
Canada's GDP expanded by 0.5 percent in the first quarter of 2025, maintaining growth from the previous quarter and surpassing market expectations. Growth was primarily driven by robust exports of goods and services, which rose 1.6 percent, alongside significant inventory accumulation driven by firms preemptively addressing US tariffs. However, underlying economic strength appeared mixed, with household consumption slowing to 0.3 percent from 1.2 percent previously and government expenditure contracting by 0.8 percent, marking its first decline in a year. On an annualized basis, Canadian GDP grew at 2.2 percent, exceeding forecasts of 1.7 percent. The USD/CAD currency pair closed the week at 1.3740.

Euro-zone inflation softens
Recent economic data from Europe highlights mixed trends. Germany's retail sales unexpectedly fell by 1.1 percent in April, marking the first decline in four months and missing expectations, driven by reductions in both food and non-food sectors. Meanwhile, Italy's inflation eased to 1.7 percent in May, marking its lowest rate since February and remaining below the European Central Bank's 2 percent target for the 20th consecutive month.

Similarly, Spain saw inflation decelerate to a seven-month low of 1.9 percent in May, driven by reduced leisure and transport prices, and a slower increase in electricity costs. Against this backdrop, European equity markets ended May broadly stable but achieved their strongest monthly performance since January, despite persistent uncertainty around US-China trade tensions and renewed tariff pressures. The EUR/USD currency pair closed the week at 1.1347.

Australia's inflation holds steady
Australia's Consumer Price Index (CPI) remained unchanged at 2.4 percent in April 2025, slightly exceeding the 2.3 percent forecast. The figure remains within the RBA's 2-3 percent target range, with mixed inflationary trends across sectors. Food and alcohol inflation moderated, while housing at 2.2 percent, recreation at 3.6 percent and health at 4.4 percent saw accelerated price gains. Transport inflation fell sharply amid a steep 12 percent drop in fuel prices. The trimmed mean CPI rose to 2.8 percent from 2.7 percent, and the core CPI excluding volatile items picked up to 2.8 percent, up from 2.6 percent in March, signaling persistent underlying inflation pressures.

Australia's Retail Sector Contracts in April
Australian retail sales unexpectedly declined by 0.1 percent month-over-month in April 2025, falling short of market forecasts of a 0.3 percent increase. This marked the first drop in retail turnover since December, driven largely by decreases in clothing, footwear, and personal accessories, as well as department store sales, each down 2.5 percent. Food retailing also dipped by 0.3 percent, reversing the previous month's gain. However, increases were seen in household goods (0.6 percent), other retailing (0.7 percent), and cafes and restaurants (1.1 percent). On a yearly basis, retail sales growth slowed to 3.8 percent, easing from March's recent peak of 4.3 percent.

RBNZ cuts rates
The Reserve Bank of New Zealand cut its official cash rate by 25 bps to 3.25 percent in May 2025, following similar cuts in April and earlier reductions in October, November, and February. The move, aligned with expectations, brings borrowing costs to their lowest since August 2022. While inflation remains within the 1 percent-3 percent target, the RBNZ flagged risks from US tariffs, global policy uncertainty, and weaker Asian demand as downside threats to growth. The bank now forecasts the rate will decline to 2.92 percent in Q4 2025 and to 2.85 percent in Q1 2026, reflecting a more dovish outlook amid growing concerns over export-driven vulnerabilities.

Yen strengthens
The Japanese yen strengthened past 144 per dollar following the release of stronger-than-anticipated Tokyo core inflation figures. The Tokyo Core CPI rose 3.6 percent year-on-year in May 2025, surpassing market expectations of 3.5 percent and marking the highest inflation rate in over two years. This robust inflation data reinforced expectations that the Bank of Japan (BOJ) might pursue further monetary tightening.

BOJ Governor Kazuo Ueda reiterated the central bank's commitment to meeting its inflation target, while highlighting global growth risks, trade uncertainties with the US, easing cost-push inflation, and falling crude oil prices as factors behind the recent downgrade in inflation forecasts. Despite these challenges, the BOJ affirmed its near-term policy decisions remain anchored to achieving its 2 percent inflation goal. The yen additionally gained support from renewed safe-haven demand amid renewed US tariff uncertainties.