Market navigator: week of 5 May 2025

The U.S. dollar was mostly lower against major currencies, including the yen and the euro, on Monday as markets weighed continued uncertainty from President Donald Trump's policies and their impact on the economy.

The greenback slid to a fresh record low against the Taiwan dollar to 28.8150 amid speculation that Taiwan was letting its currency appreciate as part of a trade deal with the U.S., or at least was unwilling to intervene to stop it rising alongside sharp inflows in capital.Trump doubled down on tariff-driven policies during an interview on Sunday, reiterating that the duties on U.S. imports would eventually make Americans rich. He announced on Sunday a new 100% tariff on films made outside the U.S.

Markets have been affected by the fact that Trump is not leaving his stance that tariffs are important, said Juan Perez, director of trading at Monex USA in Washington.

The dollar was down 0.79% against the Japanese yen at 143.805 . Against the Swiss franc , the dollar weakened 0.57% to 0.822.Trump said he would not attempt to remove Federal Reserve Chair Jerome Powell, but repeated calls for lower interest rates and called Powell a "stiff". The Fed meets on Wednesday and is widely expected to leave rates steady following a solid March payrolls report.Perez said the U.S. dollar was being hurt the most by chaos in the markets.

"I think we're returning today to...this very sour mood and descent and this idea that overall you may not necessarily rely on American markets the way you used to. And that's been seen across Treasuries."

Markets now imply only a 37% chance of a Fed rate cut in June, down from 64% a month ago. Goldman Sachs and Barclays both shifted their cut calls to July from June.

The dollar trimmed its losses briefly against the yen after the Institute for Supply Management report for April showed a larger-than-expected pickup in growth in the U.S. services sector, which accounts for two-thirds of the American economy.

Chinese onshore markets were closed but the yuan traded offshore hit its highest in almost six months at 7.1831 per dollar as investors wagered Beijing might let its currency strengthen as part of trade talks with Washington. The yuan was last up 0.23% to 7.194 per dollar.

In Europe, the euro was up 0.27% at $1.133025 and the pound was up 0.28% at $1.33050.

The Bank of England will meet on Thursday and is widely expected to cut rates by a further 25 basis points to 4.25%. Central banks in Norway and Sweden also meet this week and are expected to keep rates steady.

Reporting by Chibuike Oguh in New York, Wayne Cole and Alun John. Editing by Sonali Paul, Mark Potter, Tomasz Janowski and Nia Williams

Source: Kitco

The Institute for Supply Management (ISM) survey on Monday showed services businesses were worried about the impact of President Donald Trump's tariffs on prices and deep federal spending cuts as his administration seeks to drastically shrink the government.

Trump's on-and-off again tariffs have heightened uncertainty over the once-resilient economy. Some real estate, rental and leasing firms in the ISM survey described the implementation of import duties as "maddeningly inconsistent."

Risks of a recession have risen. Trump on Sunday announced a 100% tariff on movies produced outside the United States.

"The negative impact on services activity and inflation from the tariffs and government spending cuts are very real and already beginning to materialize," said Scott Anderson, chief U.S. economist at BMO Capital Markets. "Without a hard pivot in U.S. tariffs and government spending cuts, we expect the ISM services readings to remain under downward pressure."

The ISM said its nonmanufacturing purchasing managers index (PMI) increased to 51.6 last month from 50.8 in March. Economists polled by Reuters had forecast the services PMI dipping to 50.2.

A PMI reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the economy. The ISM associates a PMI reading above 49 over time with growth in the overall economy.

Efforts by businesses and households to get ahead of the import duties likely accounted for some of the rise in the services PMI last month. The ISM survey's new orders measure increased to 52.3 from 50.4 in March.

Inventories also rose, with some businesses saying they had "purchased some products in advance of tariffs." Others attributed the rise to increased sales volumes.

"But overall, results are improving," said Steve Miller, chair of the ISM Services Business Survey Committee.

The survey added to solid job growth in April in offering assurance that the economy was not near a recession despite gross domestic product contracting in the first quarter, burdened by a massive inflow of imports as businesses sought to avoid higher prices from tariffs.

"The economy continued to expand at the start of second quarter, albeit at a slow pace," said Matthew Martin, a senior U.S. economist at Oxford Economics. "We expect the services side of the economy to fare better than the manufacturing sector this year but will be unable to avoid the impact of higher prices and weaker consumer spending as real disposable incomes decline."

Stocks on Wall Street were trading lower. The dollar slipped against a basket of currencies. U.S. Treasury yields rose.

Eleven industries including accommodation and food services, wholesale trade, mining and utilities reported growth. Among the six reporting a contraction were finance and insurance as well as public administration.

Businesses in the agriculture, forestry, fishing and hunting sector said "tariffs are negatively impacting small business customers," many of whom "source their products from China." Trump hiked tariffs on Chinese imports to 145%, sparking a trade war with Beijing.

Educational services companies worried about the White House's cuts to research funding, while their counterparts in the healthcare and social assistance sector reported they were "seeing some vendors increasing their prices," adding that "we are actively pushing back on those increases."

Providers of public administration services said "our business is in a state of crises with uncertainty caused by both the ongoing trade war and the threats to federal funding of programs."

The swirling uncertainty was seen encouraging the Federal Reserve to leave interest rates unchanged on Wednesday.

Suppliers' delivery performance worsened last month, suggesting supply chains were starting to get strained. The ISM survey's supplier deliveries index increased to 51.3 from 50.6 in the prior month. A reading above 50 indicates slower deliveries.

A lengthening in suppliers' delivery times is normally associated with a strong economy, which would be a positive contribution to the PMI. Delivery times are, however, likely getting longer because of the rush to beat tariffs.

Some businesses reported "steel conduit lead times have increased due to factories unable to keep up with demand."

With supply bottlenecks emerging, the survey's measure of prices paid for services inputs jumped to 65.1. That was the highest reading since January 2023 and followed 60.9 in March.

Seventeen services industries reported a rise in prices, with the exception of arts, entertainment and recreation.

Most economists anticipate the tariff hit to inflation and employment could become evident by summer in the so-called hard economic data. Services sector employment continued to decline, though the pace slowed. The survey's measure of services employment increased to 49.0 from 46.2 in March.

Companies attributed the rise to "backfilling many empty positions." Others noted hiring freezes "due to uncertainty of government grants."

"A stable labor market remains key for the economic outlook as the potential determining factor for sustaining consumers through whatever tariff-related disruptions are lurking in the months ahead," said Tim Quinlan, a senior economist at Wells Fargo. "The labor market is holding up, but for how long remains a key question for growth this year."

Source: Reuters

Production spending in U.S. decreased by 26% compared to 2022

STOKING CONCERNS

Source: reuters

Source: MarketScreener

As a result of recency bias, where we assume the recent past is a permanent state of affairs, many believe near-zero interest rates are "normal." They aren't. As the chart of 10-year US Treasury yields--a proxy for interest rates throughout the economy--illustrates, rates in the 3% or lower were an anomaly that only occurred in the relatively brief period of 2011-2022.

For the five decades between 1960 and 2007, interest rates of 4% and higher were the norm. These included the glorious decades of stable growth and rising stocks / housing valuations--the 1960s, 1980s, 1990s and up to 2007, just before the financial crisis of 2008-09.

For 33 of those years, interest rates of 5.75% or higher were the norm, from 1967 to 2000. No one said that the economy would collapse if interest rates didn't drop to 3%, for it was understood that super-low interest rates would ignite inflation and incentivize destructive speculative excesses.

For the 25 years between 1970 and 1994, rates between 5.75% and 8% were normal. The 10-year Treasury yield is now around 4% to 4.2%--far lower than what was considered normal for 25 years.

It's long been noted that interest rate cycles tend to run for decades, not years. Interest rates rose for around 25 years, and then declined for 40 years from 1981 to 2020--a period that was longer than average, thanks to the dominance of central bank monetary policies, or perhaps more accurately, the growing dependence of economies on extraordinarily low interest rates for their "growth."

If history is any guide, interest rates will rise back to the historic range between 5.75% and 8% and linger there for the better part of two decades. Alternatively, rates break above that range and skyrocket into the realm of debt / inflationary crises.

The return of Treasury yields to the historically "normal" range of 4% and higher has doubled the Federal interest payments on Federal debt. It was easily predictable that super-low interest rates would encourage an orgy of borrowing and spending of all that "nearly free money," which is precisely what happened.

The interest paid by households has also soared for the same reason: not just because interest rates rose, but because the borrowed money (debt) being serviced exploded higher due to low interest rates.

Higher debt / interest payments squeeze out other spending. Debt payments come first, or the entity defaults on its debts and enters bankruptcy--a bankruptcy that tends to bankrupt the lenders who will be lucky to collect pennies on every dollar they lent out.

Households are going to have a hard time servicing debt and spending more as rates rise, for wage earners' share of the economy has been in a freefall for 50 years. Less income + higher debt service payments = lower discretionary income to spend + inability to borrow more money to spend = recession.

Interest rates are linked to inflation, but they're also linked to risk. The cost of money isn't simply tied to inflation expectations--it's also tied to speculative excesses blowing credit-asset bubbles which implode, destroying the phantom wealth generated by the bubble.

The lenders that survive the implosion are wary of lending money to all but the most conservative, risk-averse, creditworthy borrowers backed by ample collateral. That excludes the majority of households and enterprises.

Source: Zero Hedge

Source: kitco