Research
Last week, markets were caught off guard by President Trump’s announcement that he recommends imposing a 50% tariff on imports from the EU from June 1, stating that the talks with the EU are “going nowhere”. However, it did not take long until that deadline had been postponed to July 9 after a call between Trump and European Commission president Ursula von der Leyen. Both the euro and European stocks rose on the news, after having fallen following the announcement on Friday.
The US House of Representatives passed President Trump’s “big, beautiful bill” last week, a tax bill that would lower taxes, cut social spending and increase federal debt. The Committee for a Responsible Federal Budget estimates that it will raise US national debt by more than $3.3tn over the next decade. The bill was passed by a single vote after having been a hot topic of debate within the Republican party, as members disagreed on parts of the bill such as spending cuts to state-backed healthcare and clean-energy tax credits. The yield on 30-year US Treasuries rose on the announcement that the bill had been passed, as investors closely monitor concerns over the US’s fiscal deficit. The bill will now be passed on to the Senate for approval, or potential changes, before it can become law.
Weekly Highlights
Eurozone composite PMI falls into contraction in May, while US PMIs strengthen
According to preliminary estimates, the Eurozone services sector joined manufacturing in contraction territory in May, dragging down the composite PMI to 49.5. The services sector PMI dropped unexpectedly to 48.9 in May, compared to an expected figure of 50.3 and 50.1 in April. This raises renewed concerns about the health of the Eurozone economy and its ability to stage a recovery anytime soon. The services sector has been the growth engine for the eurozone in recent years, while the manufacturing sector has struggled amid high energy costs and fierce competition. This weakness reflects a drop in business activity and sluggish domestic and international demand that has weighed heavily on the sector. Business confidence dropped to its lowest level since September 2022.
On the manufacturing side, the PMI increased to 49.4 in May, up from 49 in April. This marks the slowest contraction in the manufacturing sector since August 2022, driven by increased output and stabilising new orders. However, much of this is attributed to increased production in anticipation of trade tariffs.
Source: Bloomberg, BIL
In the US, activity in both the services and manufacturing sectors strengthened, with the Composite PMI rising from 50.6 in April to 52.1 in May. The services PMI increased from a 17-month low of 50.8 in April to 52.3 in May. Despite a significant drop in orders from abroad, new orders were up. However, uncertainty over the past few months has led firms to reduce their employment levels for the second time in four months. Amid higher labour costs, input costs rose, leading to a spike in output charge inflation.
The manufacturing PMI also improved in May, rising from 50.2 to 52.3. This was the strongest improvement in business conditions since June 2022, driven by growth in factory production and new orders. The biggest positive contribution came from inventories, which increased by the most since the survey began in 2009.
Source: Bloomberg, BIL
Growth in China's industrial production and retail sales slowed in April
Following a strong start to 2025, China’s industrial output growth slowed in April as the impact of US trade tariffs began to be felt. Having grown by 7.7% in March, output growth slowed to 6.1% year on year in April. Although the impact of the tariffs is becoming apparent, growth was stronger than expected.
On the consumption side, households showed less confidence in April than in March, with retail sales rising by 5.1%, compared to 5.9% the previous month. Ongoing trade tensions with the US and persistent employment uncertainty means that confidence remains subdued.
China and the US have agreed to pause 'reciprocal' tariffs for 90 days while discussing a long-term agreement. However, the remaining tariffs are still much higher than before President Trump returned to the White House. In April, shipments from China to the US fell by 21%, as Chinese manufacturers began redirecting trade to avoid tariffs. Shipments to the US are expected to increase again during the 90-day pause, as importers attempt to stockpile goods while they await more clarity on what agreement might be reached.
UK inflation soared to 3.5% in April
Consumer prices in the UK rose by 3.5% year on year in April, up from 2.6% in March. Although a rise in inflation last month was expected due to tax rises part of the Autumn budget kicking in and higher utility bills, the rise was more than expected.
In April, the rise in employers’ national insurance contributions came in place, while costs for gas, electricity and water increased. In addition, air fares surged by 27.5% from March, driven up by the timing of Easter. Services inflation, which is closely watched by interest rate setters, rose to 5.4% in April, up from 4.7% in March and the expected 4.8%. Core inflation, excluding volatile categories such as food and energy, also increased by more than expected to 3.8%.
Source: Bloomberg, BIL
UK inflation is now well above the EU average, and the Bank of England expects it to peak at 3.7% later this year.
With inflation rising to a 15-month high, markets are now expecting up to two more interest rate cuts by the Bank of England before the end of the year. The pound climbed to its highest level against the dollar since the start of 2022 on the news, before retreating again.
However, this did not stop retail sales from jumping by 1.2% in April compared to the previous month. This was the sharpest monthly increase since January and was mainly driven by a 3.9% increase in food store sales, which had declined in the two previous months. Good weather boosted sales in supermarkets, butchers, bakers and alcohol and tobacco outlets. Meanwhile, non-food store sales declined by 0.7%.
Eurozone consumer confidence rose in May
With the brighter weather brought by May, Euro Area consumer sentiment also perked up. The European Commission’s confidence indicator rose to -15.2, from -16.6 in April. Economists expected a reading of -16. Despite the partial recovery, consumer confidence remains markedly below its long-term average of -10.58, and also below the 2024 average.
Tariffs and trade disputes are worrying consumers and last week, it became clear that this theme is not isolated to the US and its trading partners. It was revealed that the EU intends to impose a fee of EUR 2 on billions of small packages entering the Eurozone, mainly from China. It is estimated that 4.6 billion items are annually imported directly to people’s homes, with online platforms in other countries offering prices that EU retailers can hardly compete with. It is expected that the revenues from this new tax will cover the cost of extra customs checks, while the remaining money will be directed to the EU budget.
Source: European Commission, Bloomberg, BIL
Calendar for the week ahead
Monday – Switzerland Non Farm Payrolls (Q1)
Tuesday – EU New Car Registrations (April). Germany GfK Consumer Confidence (June). Switzerland Balance of Trade (April). Eurozone Economic Sentiment (May), Consumer Confidence (Final, May). US CB Consumer Confidence (May).
Wednesday – ECB Consumer Inflation Expectations (April). Switzerland Economic Sentiment (May).
Thursday – US GDP Growth Rate (Q1, second estimate), Jobless Claims.
Friday – Germany & Switzerland Retail Sales (April). Switzerland KOF Leading Indicators (May). US Michigan Consumer Sentiment (Final, May).
Disclaimer
All financial data and/or economic information released by this Publication (the “Publication”); (the “Data” or the “Financial data
and/or economic information”), are provided for information purposes only,
without warranty of any kind, including without limitation the warranties of merchantability, fitness for a particular
purpose or warranties and non-infringement of any patent, intellectual property or proprietary rights of any party, and
are not intended for trading purposes. Banque Internationale à Luxembourg SA (the “Bank”) does not guarantee expressly or
impliedly, the sequence, accuracy, adequacy, legality, completeness, reliability, usefulness or timeless of any Data.
All Financial data and/or economic information provided may be delayed or may contain errors or be incomplete.
This disclaimer applies to both isolated and aggregate uses of the Data. All Data is provided on an “as is” basis. None of
the Financial data and/or economic information contained on this Publication constitutes a solicitation, offer, opinion, or
recommendation, a guarantee of results, nor a solicitation by the Bank of an offer to buy or sell any security, products and
services mentioned into it or to make investments. Moreover, none of the Financial data and/or economic information contained on
this Publication provides legal, tax accounting, financial or investment advice or services regarding the profitability or
suitability of any security or investment. This Publication has not been prepared with the aim to take an investor’s particular investment objectives,
financial position or needs into account. It is up to the investor himself to consider whether the Data contained herein this
Publication is appropriate to his needs, financial position and objectives or to seek professional independent advice before making
an investment decision based upon the Data. No investment decision whatsoever may result from solely reading this document. In order
to read and understand the Financial data and/or economic information included in this document, you will need to have knowledge and
experience of financial markets. If this is not the case, please contact your relationship manager. This Publication is prepared by
the Bank and is based on data available to the public and upon information from sources believed to be reliable and accurate, taken from
stock exchanges and third parties. The Bank, including its parent,- subsidiary or affiliate entities, agents, directors, officers,
employees, representatives or suppliers, shall not, directly or indirectly, be liable, in any way, for any: inaccuracies or errors
in or omissions from the Financial data and/or economic information, including but not limited to financial data regardless of the
cause of such or for any investment decision made, action taken, or action not taken of whatever nature in reliance upon any Data
provided herein, nor for any loss or damage, direct or indirect, special or consequential, arising from any use of this Publication
or of its content. This Publication is only valid at the moment of its editing, unless otherwise specified. All Financial data and/or
economic information contained herein can also quickly become out-of- date. All Data is subject to change without notice and may not be
incorporated in any new version of this Publication. The Bank has no obligation to update this Publication upon the availability of new data,
the occurrence of new events and/or other evolutions. Before making an investment decision, the investor must read carefully the terms and
conditions of the documentation relating to the specific products or services. Past performance is no guarantee of future performance.
Products or services described in this Publication may not be available in all countries and may be subject to restrictions in some persons
or in some countries. No part of this Publication may be reproduced, distributed, modified, linked to or used for any public or commercial
purpose without the prior written consent of the Bank. In any case, all Financial data and/or economic information provided on this Publication
are not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be
contrary to law and/or regulation. If you have obtained this Publication from a source other than the Bank website, be aware that electronic
documentation can be altered subsequent to original distribution.
As economic conditions are subject to change, the information and opinions presented in this outlook are current only as of the date
indicated in the matrix or the publication date. This publication is based on data available to the public and upon information that is
considered as reliable. Even if particular attention has been paid to its content, no guarantee, warranty or representation is given to the
accuracy or completeness thereof. Banque Internationale à Luxembourg cannot be held liable or responsible with respect to the information
expressed herein. This document has been prepared only for information purposes and does not constitute an offer or invitation to make investments.
It is up to investors themselves to consider whether the information contained herein is appropriate to their needs and objectives or to seek advice
before making an investment decision based upon this information. Banque Internationale à Luxembourg accepts no liability whatsoever for any investment
decisions of whatever nature by the user of this publication, which are in any way based on this publication, nor for any loss or damage arising
from any use of this publication or its content. This publication, prepared by Banque Internationale à Luxembourg (BIL), may not be copied or
duplicated in any form whatsoever or redistributed without the prior written consent of BIL 69, route d’Esch ı L-2953 Luxembourg ı
RCS Luxembourg B-6307 ı Tel. +352 4590 6699 ı www.bil.com.
Read more