Week 20 (May 12-May 18, 2025)
Last week’s market activity reflected renewed optimism around trade and technology, balanced by ongoing economic uncertainties.
On Monday, the markets adopted an optimistic outlook following the trade agreement between the US and China, and this positive sentiment largely persisted throughout the week.
Economic data was mixed: retail sales showed little change, and the Producer Price Index declined slightly, suggesting easing inflation.
Consumer Price Index (CPI) & Core CPI (April): Released Tuesday. Showed trends in inflation and underlying price pressures.
Producer Price Index (PPI) (April): Released Thursday. Provided updates on wholesale inflation, with PPI MoM at -0.4% and Core PPI MoM at -0.5%.
Retail Sales (April): Released Thursday. Indicated consumer spending patterns, with Retail Sales MoM at 0.1%.
Industrial Production (April): Released Thursday. Reflected manufacturing sector performance, with Industrial Production MoM at 0%, YoY at 1.2%.
Initial Jobless Claims: Released Thursday. Registered at 229,000.
Housing Starts (April): Released Friday.
University of Michigan Consumer Sentiment (May, Preliminary): Released Friday, May 16. Dropped to 50.8, marking the second-lowest reading on record and reflecting ongoing concerns about inflation and tariffs
Inflation data indicate that inflationary pressures are moderating, although concerns remain regarding the effects of tariffs, and certain areas like shelter and energy continue to experience price increases.
Housing starts rose despite weakening builder confidence, which is largely driven by concerns over tariffs and increasing material costs.
At the same time, the drop in building permits points to potential challenges for future construction activity.
This underscores the significance of the upcoming existing-home sales data for April 2025, scheduled for release on May 22, 2025, at 10 a.m. EST.
Current housing market trends-including slower price appreciation, declining sales, elevated mortgage rates, and ongoing affordability issues-signal a potential economic slowdown.
Although a crash similar to 2008 is unlikely due to limited inventory, the housing sector’s fragility serves as a clear cautionary indicator for the broader U.S. economy.
Never bet against U.S. consumers
The University of Michigan Consumer Confidence Survey highlighted growing consumer pessimism, with concerns centered on rising inflation, uncertainty around trade policy, and weakening expectations for personal finances and the broader economy.
It illustrates Americans’ tendency to maintain spending by adapting their habits during economic challenges; however, in extended downturns, even the most resilient consumers reduce spending, which serves as an indicator of the economy’s overall health.
After the markets closed on Friday, May 16, 2025, Moody’s announced that it had downgraded the United States’ long-term issuer and senior unsecured credit ratings from Aaa to Aa1.
Past credit rating downgrades have typically sparked short-term market volatility, often leading to declines in stock prices and fluctuations or increases in Treasury yields.
However, the broader, long-term effects on the U.S. economy and government borrowing costs have generally been limited, as global investors still regard U.S. debt as a safe haven.
Of course, every economic event has its own unique dynamics!
For example, when Standard & Poor’s lowered the U.S. rating from AAA to AA+ in August 2011, markets reacted with immediate turbulence. Both stocks and bonds experienced notable swings, though much of the volatility was attributed to the debt ceiling standoff rather than the downgrade itself.
Despite the initial turmoil, the long-term impact was modest. Investors continued to favor U.S. Treasuries, largely due to the absence of compelling alternatives for global reserves.
Similarly, Fitch’s downgrade of the U.S. from AAA to AA+ in August 2023 triggered a spike in volatility across equity and bond markets. Treasury yields climbed, signaling increased borrowing costs, while stock prices fell as investors processed the news.
We strive to analyze the economy using a rigorous scientific approach, as we always do. While we understand the optimism among market participants, we remain cautious due to some emerging challenges ahead. Although we do not anticipate an imminent recession, we believe there are underlying structural issues within the economy that could lead to a slowdown. Nevertheless, as always, we remain hopeful that the economy will progress positively and that market participants will reap the greatest possible benefits.