Trump’s Tax Bill Spurs Treasury Yield Volatility, Signals Fiscal Risks Ahead

Economic

Summary:

U.S. Treasury yields retreated slightly from recent highs after President Donald Trump's sweeping tax bill narrowly passed the House. While markets remained steady...

Market Snapshot: Stability Masks Structural Concerns

On Thursday, the S&P 500 and Dow Jones Industrial Average closed mostly flat following the House passage of Trump’s tax legislation, while the Nasdaq gained 0.28%. This muted response belied deeper unease in bond markets, where long-term Treasury yields had surged before modestly pulling back. The 30-year yield, which briefly hit 5.161% — its highest level since October 2023 — eased to 5.044%, while the 10-year fell to 4.535%.

Despite the yield retreat, fixed-income strategists remain cautious. Elevated yields indicate rising investor demands for term premium — the additional compensation required to hold long-dated U.S. debt — reflecting skepticism about America’s deteriorating fiscal trajectory.

Trump’s Bill: Short-Term Stimulus, Long-Term Strain

Dubbed the “big, beautiful bill” by Trump, the proposed legislation includes significant tax cuts and expanded defense spending, fulfilling many of his populist pledges. According to Jed Ellerbroek of Argent Capital Management, the bill may stimulate near-term economic activity. However, with the Congressional Budget Office estimating a $3.8 trillion addition to the national debt over a decade, the structural deficit is poised to deepen.

This fiscal arithmetic — reduced revenues and elevated expenditures — comes as the U.S. debt burden nears 124% of GDP. The timing of the bill’s progression, following Moody’s credit rating downgrade of U.S. sovereign debt, has only added to global investors’ concern.

Global Bond Market Reaction: From Confidence to Caution

Bondholders’ faith in U.S. government obligations is being tested. Recent weak auction outcomes in both the U.S. and Japan underscore that even in highly liquid markets, investor appetite is no longer unconditional. The move toward higher yields across the U.S., UK, and Japanese long-end curves signals that governments must now pay more to borrow — not due to growth optimism, but fiscal mistrust.

This erosion of safe-haven confidence is visible in the growing reluctance of foreign investors — Japan and China included — to absorb long-dated U.S. bonds, adding to upward pressure on yields.

Fed Independence and the Supreme Court Signal

One notable positive development: the U.S. Supreme Court on Thursday indicated that Federal Reserve board members may enjoy protections from unilateral presidential dismissal. This was seen as a reassuring signal for markets, suggesting Fed Chair Jerome Powell and his colleagues would not be at immediate risk of removal, despite Trump's history of confrontational rhetoric toward central bank leadership.

Such independence is viewed as critical for maintaining monetary policy credibility, particularly amid volatile fiscal policymaking.

Asia’s Reaction and Inflationary Tensions

Asian markets reflected a cautious rebound. Japan’s Nikkei 225 rose 0.6% after data showed April core inflation hit 3.5% — the highest since January 2023 — raising expectations that the Bank of Japan may consider another rate hike later this year. Yet, Japan’s growth headwinds and exposure to U.S. tariffs continue to complicate policy decisions.

Meanwhile, China and the U.S. resumed official communications following a call between deputy foreign ministers — a step that, while modest, was welcomed by investors seeking signs of trade stabilization.

Tech and Geopolitics: Claude 4 Debuts, India’s Manufacturing Dilemma

Tech innovation continued to generate headlines as Anthropic — backed by Amazon — launched Claude 4, a new line of AI agents positioned as rivals to OpenAI’s GPT-4. The company claims Claude Opus 4 is the world’s most capable coding model, able to function autonomously through a simulated seven-hour workday.

On the global manufacturing front, India’s bid to absorb production displaced by U.S.-China trade friction faces hurdles. Despite favorable demographics and low labor costs, experts caution that infrastructure, logistical gaps, and scale remain limiting factors — lessons learned from Vietnam’s gradual industrial rise.

Wait-and-See Mode, But Risk Premiums Rising

Financial markets appear to be in a holding pattern, with equities steady and bond yields elevated but off their peaks. Yet beneath this surface calm, key dynamics are shifting. With Trump’s fiscal plans likely to exacerbate structural deficits and geopolitical uncertainty lingering, global investors are demanding more compensation to fund government debt.

In short, while the U.S. economy may see a temporary lift, the cost of borrowing — both in dollars and in trust — is rising.

Source: CNBC

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James Whitman

Forex

Technical Analysis

The EURUSD rate continues to rise, breaking above the 1.1300 level amid ongoing US dollar weakness. The outlook for further gains remains uncertain for now. Discover more in our analysis for 23 May 2025.

EURUSD forecast: key trading points

● Market focus: Germany’s final Q1 GDP growth rate came in at 0.4%

● Current trend: moving upwards

● EURUSD forecast for 23 May 2025: 1.1255 and 1.1360

Fundamental analysis

The EURUSD pair is on the rise due to growing concerns over US fiscal policy. President Trump’s new budget proposal, which includes tax cuts and increased defence spending, has sparked fears of further ballooning the US national debt.

Federal Reserve Governor Christopher Waller recently stated that there’s still room for rate cuts this year, depending on how Trump’s tariff policy unfolds. Market anticipation of a Fed rate cut continues to weigh on the US dollar.

EURUSD technical analysis

On the H4 chart, the EURUSD pair shows strong upward momentum, climbing above the 1.1300 level. The Alligator indicator is moving upwards, supporting the bullish trend. The key support level for continued growth now lies at 1.1255.

The short-term EURUSD forecast suggests further growth towards 1.1360 in the near term if bulls hold the price above 1.1300. Conversely, if bears push the price below 1.1300, the pair could correct towards the 1.1255 support level.

Summary

The EURUSD pair has risen above the 1.1300 level as US budget concerns weigh on the dollar. The Fed is waiting for Trump’s tariff policy to be settled before proceeding with further monetary easing.

Source: RoboForex

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Economic

Core CPI and Inflation Dynamics

April’s core Consumer Price Index (CPI), which excludes fresh food but includes energy, rose 3.5% year-on-year, exceeding economists’ expectations and the March figure of 3.2%. This marked the highest level since January 2023 and extended the CPI’s stretch above the BOJ’s 2% target to more than three years. Prices excluding both fresh food and energy—a gauge closely monitored by the BOJ—also increased by 3.0%, up from 2.9% in March.

The largest contributors to this inflation surge were food prices, which rose 7% year-on-year. Notably, rice prices spiked 98.6%, and chocolate prices surged 31%, reflecting widespread price hikes by companies at the start of Japan’s fiscal year in April.

BOJ’s Monetary Tightrope

The inflation data has put pressure on the BOJ to act. Having exited its ultra-loose monetary stance in 2024 and lifted short-term rates to 0.5% in January 2025, the central bank had signaled more rate hikes could follow—if inflation stayed persistently high.

Analysts, including those at Capital Economics and Moody’s Analytics, are split on the timeline. Some anticipate a hike as early as October 2025, while others expect BOJ to wait until early 2026, depending on how the inflation outlook evolves under the shadow of U.S. tariff policies.

BOJ Governor Kazuo Ueda has noted that uncertainties—especially those triggered by global trade disruptions and sluggish domestic demand—have delayed the convergence of inflation with the central bank’s target conditions.

Tariffs and Wage Growth Risks

A key challenge for the BOJ is whether Japan’s inflation is being driven by sustainable domestic demand or imported cost pressures. Service-sector inflation decelerated slightly to 1.3%, hinting at sluggish wage-pass-through. Although the “Shunto” spring wage negotiations led to notable wage hikes in 2025, real income gains are being eroded by still-elevated inflation levels.

Moreover, U.S. President Donald Trump’s renewed tariff campaign has cast a pall over Japan’s growth outlook, prompting firms to reconsider planned investment and wage increases. The BOJ already trimmed its growth forecasts in response to these global pressures, underscoring a fragile domestic economy.

Economic Outlook and Policy Implications

Despite robust inflation figures, the Japanese economy contracted in Q1 2025 due to stagnant consumption and weak export momentum. Analysts anticipate inflation to moderate toward 2% by the end of the year as the yen’s recent appreciation helps ease import costs. That could further delay BOJ’s next rate move unless there is clear evidence of wage-driven inflation.

The central bank is thus caught between the imperative to normalize policy and the need to shield growth from external shocks. The decision in the coming months may hinge not only on domestic price dynamics but also on geopolitical and trade developments.

April’s CPI data underscores the BOJ’s complex balancing act: inflation remains sticky, but real consumption is weak and the global backdrop is increasingly volatile. While a 2025 rate hike remains on the table, the BOJ’s next move will likely be cautious, data-driven, and contingent on how Japan’s economy weathers Trump-era trade tensions and the evolving domestic wage landscape.

Source: Reuters

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Economic

Treasury Stabilization and Asian Equity Uptick

After several days of bond market turbulence, long-dated U.S. Treasuries saw a mild recovery, easing pressure on global financial markets. The 30-year Treasury yield dipped to 5.048%, down from its 19-month high of 5.161%, reflecting investor demand at more attractive yield levels. This stabilization coincided with a 0.5% gain in the MSCI Asia-Pacific index (excluding Japan), helping the region reverse its earlier weekly losses.

Japan’s 30-year bond yield also retreated from record highs, falling 5 basis points to 3.115%. The Bank of Japan continues to monitor the sharp movements amid broader fiscal tightening expectations.

Political Uncertainty and U.S. Fiscal Concerns Loom

Markets remain on edge after the U.S. House narrowly approved Trump’s tax bill, which may add $3.8 trillion to the national debt over the next decade. Although the bill aims to deliver on several campaign promises, including tax relief and increased defense spending, it has intensified fiscal anxiety.

Moody’s recent downgrade of the U.S. credit rating added to market concerns about long-term debt sustainability, triggering increased demand for clarity on future issuance and policy direction. Strategists, including NAB’s Ken Crompton, warned that there’s little in the current bill to suggest U.S. bond issuance will meaningfully decline anytime soon.

Asia Mixed as Inflation and Currencies Shift

Across Asia, market performance was uneven. Japan’s Nikkei rose 0.5% after data showed core inflation accelerated to its fastest pace in over two years, raising the likelihood of further policy shifts by year-end. Meanwhile, Hong Kong’s Hang Seng gained 0.6%, but Chinese blue chips remained flat, weighed down by lingering trade concerns.

Currency markets mirrored risk sentiment. The dollar remained under pressure, on track for a 1.3% weekly decline. The euro advanced to $1.1309—its first weekly gain in over a month—while the yen and Swiss franc were similarly buoyed by safe-haven demand.

Outlook Hinges on Tariffs and Fed Independence

Federal Reserve Governor Christopher Waller noted that rate cuts remain possible later in 2025, contingent on inflation trends and future tariff actions. This provided some optimism, but analysts cautioned that volatility could return if the Trump administration escalates trade measures or signals further institutional reshuffling.

Adding to the mix, a U.S. Supreme Court ruling on Thursday suggested limits on executive power to remove key federal officials, including potentially Fed Chair Jerome Powell. While not definitive, the line in the ruling provided temporary reassurance to markets wary of executive overreach.

Friday’s gains in Asia reflect modest relief rather than renewed optimism. As global markets digest the consequences of Trump’s fiscal agenda, bond market volatility and uncertainty over trade and central bank independence will continue to shape sentiment. Investors remain on edge, balancing technical rebounds with deeper structural concerns.

Source: Reuters

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Economic

Weather-Fueled Retail Rebound Surpasses Forecasts

The UK’s retail sector received an unexpected boost in April, as figures from the Office for National Statistics (ONS) revealed a 1.2% monthly rise in retail sales volumes—significantly beating the 0.2% growth predicted by economists in a Reuters poll. This strong performance followed a modest 0.1% increase in March, which was revised down.

This marks the fourth consecutive month of rising retail sales, a streak not seen outside of pandemic-related rebounds since 2004. The surge was driven primarily by a 3.9% jump in food sales, with the ONS attributing the increase in part to the UK's sunniest April on record, as reported by the Met Office.

Consumer Sentiment on the Mend

In a separate report, market research firm GfK indicated that British consumers are growing more optimistic in May. While overall economic prospects remain subdued due to stagnant productivity and global uncertainty, the consumer mood appears to be improving—possibly a reflection of falling interest rates, a softer inflation trajectory, and early signs of easing in global trade tensions.

Though non-food sales dipped 0.7% in April, the strength of food and garden-related purchases offset broader retail sector softness. The unusually warm and bright spring likely encouraged spending on seasonal items, leisure, and social occasions, underscoring how weather-related factors can temporarily buoy consumption metrics.

Looking Ahead: Cautious Optimism for Retailers

Despite April’s strong retail figures, sustained momentum may be difficult to maintain unless underlying wage growth and employment stability improve. However, the uptick in consumer confidence provides some hope that households could help stabilize the UK economy, which remains fragile amid sluggish investment, Brexit aftershocks, and persistent regional inequality.

April’s data offers a welcome counterpoint to otherwise cautious economic forecasts. If May continues to bring improving weather, low borrowing costs, and steady consumer sentiment, the retail sector may help carry growth through a critical quarter for policymakers and businesses alike.

Source: Reuters

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Economic

Germany's revised Q1 GDP figures revealed a surprisingly resilient economy. According to updated data from the Federal Statistical Office (Destatis), gross domestic product grew by 0.4% quarter-on-quarter, significantly higher than the preliminary estimate of 0.2%. This is the strongest quarterly growth since Q3 2022, when the economy expanded by 0.6%, marking a crucial reversal from the 0.2% contraction in Q4 2024 that had reignited fears of a technical recession.

Key Growth Drivers: Trade and Household Spending

The primary forces behind the unexpected economic momentum were foreign trade and private consumption. Exports surged by 3.2% quarter-on-quarter, notably lifted by early ordering from U.S. partners anticipating tariff hikes under President Trump's administration. The move to front-load shipments helped Germany's export machine offset some of the anticipated drag from protectionist policies.

Household consumption, another key contributor, rose 0.5%—a notable improvement given previous stagnation. This rise reflects stronger consumer confidence and possibly disinflationary trends supporting real income recovery.

However, government consumption dropped by 0.3%, attributed to Germany operating on a provisional budget due to the collapse of Chancellor Olaf Scholz’s coalition government late last year. The interim fiscal management has constrained public expenditure at a time when economic stimulus might be needed to counter external shocks like tariffs and weak global demand.

Policy Challenges and Outlook

Despite the upbeat data, structural challenges remain. Germany's economy remains heavily exposed to global trade disruptions, especially from the U.S., its largest trading partner in 2024, with two-way goods trade valued at €253 billion. The tariff environment remains volatile, and trade policy shifts could still hamper momentum in subsequent quarters.

The new finance minister is under pressure to finalize the 2025 and 2026 federal budgets amid fiscal discipline rules and increased spending demands. With the debt brake rule (Schuldenbremse) constitutionally anchored, Germany's capacity to use fiscal stimulus remains limited unless reforms or exceptions are legislated.

Encouraging Signs Amid Structural Fragility

Germany's better-than-expected economic performance in Q1 2025 provides a welcome respite from recent stagnation fears. The surge in exports, aided by tactical trade timing, and modest revival in household spending underline that Germany still retains economic levers, even amid geopolitical and fiscal constraints.

Yet the reliance on trade as a growth engine remains a double-edged sword. Sustained recovery will depend on Germany’s ability to navigate the tariff-heavy global landscape, accelerate industrial transformation, and restore long-term fiscal coherence in the upcoming budget cycles.

Source: Reuters

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James Whitman

Economic

Japan's core inflation accelerated at its fastest annual pace in more than two years in April, on steady rises in food costs, data showed on Friday, raising the odds of another interest rate hike by year-end.

The data underscores the Bank of Japan's (BOJ) predicament of balancing price pressures from persistent food inflation against growth headwinds from US President Donald Trump's tariffs.

The core consumer price index (CPI), which excludes fresh food but includes oil prices, rose 3.5% in April from a year earlier, exceeding market forecasts for a 3.4% gain and accelerating from a 3.2% increase in March.

It was also the fastest annual pace of growth for the index since the 4.2% rise in January 2023, holding above the central bank's 2% target for more than three years.

"Underlying inflation remained strong in April, despite the slashing of public high school fees," said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

"Our own view is that the persistent strength in inflation will convince the (BOJ) to hike interest rates yet again in October," he said.

A Reuters poll, taken on May 7-13, showed most economists expect the BOJ to hold rates steady through September, with a small majority forecasting a hike by year-end.

The latest uptick in inflation was driven mostly by a food price surge of 7.0%, in a sign many companies hiked prices at the April start of Japan's new fiscal year. The price of rice spiked 98.6% last month from a year earlier, while that of chocolate jumped 31%.

Another index stripping away both fuel and fresh food, which is scrutinised by the BOJ as a better gauge of demand-driven price pressure, rose 3.0% in April from a year earlier, the data showed. It accelerated from a 2.9% gain in March.

The BOJ ended a decade-long, massive stimulus programme last year, and in January raised short-term interest rates to 0.5%, on the view that Japan was on the cusp of durably meeting its 2% inflation target.

While the central bank has signalled readiness to raise rates further, the economic repercussions from Trump's tariffs forced it to cut its growth forecasts, and complicated decisions around the timing of the next rate increase.

BOJ governor Kazuo Ueda has said the timing for underlying inflation to converge towards the the central bank's target has been pushed back somewhat, due to "extremely high" economic uncertainty.

Wage risks

While the data highlighted sticky price pressure, some analysts expect inflation to slow back near the BOJ's target by year-end, as the yen's rally push down import costs.

The hit to growth from US tariffs may also intensify later this year, and discourage firms from hiking pay, casting doubt on whether Japan can achieve a wage-driven rise in prices — a key prerequisite for further rate hikes, analysts say.

Service-sector inflation moderated to 1.3% in April, from 1.4% in March, a sign companies were slow in passing on rising labour costs, the CPI data showed.

Consumption remains stagnant, as wage growth fails to catch up with inflation, a key factor that drove Japan's economy into contraction in the first quarter.

"Shunto wage negotiations delivered a solid pickup in 2025, but with inflation cooling more slowly than hoped, those gains won't go as far as they could," said Stefan Angrick, an analyst at Moody's Analytics, adding that US tariffs will hurt growth.

"The Bank of Japan isn't done hiking, but it's not moving just yet. Tariff haze will keep the central bank on hold for the time being. We expect another rate hike in early 2026," he said.