Fresh Concerns about U.S. and Chinese Economies – Currency Thoughts
Fresh Concerns about U.S. and Chinese Economies
May 19, 2025
(191) Two related developments conspired to hurt the U.S. Treasury bond markets in overnight trading. The Moody’s agency downgraded their rating of U.S. federal debt to Aa1 from Aaa, projecting sizable additional increases over the coming decade in both debt to 134% of GDP from 98% and in the deficit to GDP ratio to 9%. Secondly, the Trump administration’s very ambitious tax-cutting proposal was narrowly passed by the House Budget Committee, as a number of Republican fiscal hawks voted present instead of nay.
The 30-year U.S. Treasury yield has jumped eight basis points in response to its highest level in 19 months, 5.03%, which compares with 4.42% in early April right after the tariff plans unveiled on Liberation Day. The 10-year yield of 4.55% is seven basis points higher, and upward pressure on long-term interest rates has not been limited to America. Ten-year sovereign debt yields are also up seven bps in the U.K. and Italy, six bps in France, five bps in Spain and Germany and four bps in Japan.
Stock markets have suffered a setback, too, with share prices in the Pacific Rim closing this Monday with losses of 0.9% in South Korea, 1.5% in Taiwan, 1.2% in New Zealand, 0.7% in Japan, and 0.6% in Australia and Singapore. European equity losses so far today are led by Italy (-1.9%), France (-0.7%) and the U.K. (-0.6%). In futures trading, the major U.S. indices have lost 1.5% in the Russell 2000, 1.2% in the S&P 500, 1.4% in the Nasdaq and 0.7% in the DOW.
The weighted DXY dollar index is 1% lower. So is the dollar’s value against the euro, which is also trading 1.8% weaker than its value a week ago. Other dollar losses so far today include drops of 0.8% versus sterling, 0.7% relative to the South Korean won and Swiss franc, and 0.6% vis-a-vis the Japanese yen and Australian and New Zealand dollars. Gold has risen 0.8%.
Bitcoin has sunk 3.2%, while oil is 1.3% lower.
Released April Chinese data though mixed failed to dissipate growth concerns about the world’s second largest economy. Year-on-year growth in retail sales of 5.1% was down from March’s 15-month high of 5.9% and also less than analysts were predicting. Fixed asset investment recorded a 4.0% on-year rise in January-April, down from 4.2% in the year’s first quarter and also lower than had been expected. A 4.0% year-on-year drop in house prices highlights a continuing recession in China’s property market. The jobless rate remained above 5.0%, although at a 4-month low of 4.1%, and industrial production outperformed forecasts with a year-on-year increase of 6.1%, still well down from March’s 45-month largest gain of 7.7%. In summarizing these statistics, government officials remarked that the recovery needs further consolidation, which fanned speculation that the Peoples Bank of China could announce further slight cuts in the 1- and 5-year loan prime rates tomorrow.
The second estimate of consumer price inflation in the euro area during April (up 0.6% on month and 2.2% on year) matched the preliminary figures reported at the start of May. The 12-month 2.2% increase also matched March’s pace, continuing a comparatively flat pattern (2.4% in April 2024, for instance) after the earlier sharp disinflation from a peak of 10.6% in October 2022. Service sector prices accounted for 1.8 percentage points of the 2.2% on-year inflation in April, and food contributed another 0.6 percentage points to the overall figure. But energy posted a 3.5% on-year price decline.
The steadiness of average inflation in Europe as a whole between April 2024 and last month masks variation when looking at individual economies. CPI inflation was higher last month than in April 2024 in Italy, the Netherlands, Latvia, Lithuania, Slovakia, Poland, Estonia, Finland, Denmark, Croatia, Hungary, and Romania, but net price deceleration occurred alternatively in Germany, France, Spain, Belgium, Austria, Sweden, Iceland, Slovenia, the Czech Republic, Switzerland, Greece, Cyprus, Portugal and Norway.
The Rightmove British house price index this month posted its smallest year-on-year increase (just 0.6%) in ten months.
Despite a drop of 0.3% in March, Japan’s tertiary index of service sector activity rose 1.7% last quarter after weak quarterly changes of +0.6% last summer followed by -0.1% in the final quarter of 2024. A year-on-year advance of 2.6% was the most in 13 months and twice the 1.3% average increase in 2024.
Real GDP in Thailand grew 0.7% in the first quarter of this year and 3.1% from the same quarter a year earlier.
Producer output prices in New Zealand jumped 2.1% last quarter, its fastest leap since the second quarter of 2022, and year-on-year PPI-O inflation accelerated to a 2-year high of 2.6%. Separately, New Zealand’s service sector purchasing managers index fell 0.4 index points further below the 50 neutral level to a 4-month low of 48.5. That’s still much closer to January’s 11-month high of 50.3 than to the 34-month low of 41.5 touched in June 2024.
Putin and Trump have a scheduled phone conversation today about Russia’s war in Ukraine. Canada is observing its Victoria Day holiday today, and tomorrow will mark the 98th anniversary of the first non-stop transatlantic plane trip piloted by Charles Lindbergh.
Copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without expressed permission.
Tags: Chinese retail sales and industrial production, European consumer price inflation, New Zealand PPI and services PMI
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