Muzinich Weekly Market Comment: And breathe….

May 12, 2025

If you have any feedback on this article or are interested in subscribing to our content, please contact us at opinions@muzinich.com or fill out the form on the right hand side of this page.

--------

In our latest roundup of the key developments in financial markets and economies, we examine the reasons behind a calm start to May after April’s turbulence. 

Financial market performance in early May has been a case of so far, so good, and reflective of a typical risk-on recovery. Government bond yields are up, credit spreads are tightening, and high-yield corporates are outperforming their investment-grade peers.

Volatility continues to fall,^[1] while commodities and digital currencies are rising. Traditional safe-haven currencies like the Japanese yen and Swiss franc are weakening and equities are up across the board, with the Bloomberg World Large & Mid Cap Price Return Index up 1.6% this month.

Five weeks on from Donald Trump’s Liberation Day reciprocal tariff announcement, markets are still tracking the typical eight-week post-event recovery pattern, as positive developments, both political and economic, continue to outweigh negative surprises.

Cool down

On the political front, the US administration continues to dial back on its aggressive tariff stance, including a 90-day pause on reciprocal tariffs, exemptions for Chinese information and communications technology products, adjustments to auto parts tariffs to avoid overlap with steel and aluminium duties, and partial reimbursements to automakers for increased costs.^[2]

Last week, the US and China agreed to begin de-escalation talks. The discussions will be held in Switzerland, with US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer representing the US, and Vice Premier He Lifeng representing China.^[3]

Separately, the US struck its first trade deal since Trump took office. The agreement between the US and UK maintains a 10% baseline tariff rate but includes carve-outs, such as in the auto sector, where tariffs will fall from the initially proposed 27.5% to 10%, and metals, where duties will drop to 0%, bringing the effective rate slightly below the initial threshold.^[4] In exchange, the UK will fast-track US goods through customs, purchase US$10 billion of aircraft, and reduce barriers to American agricultural, chemical, energy and industrial exports, including beef and ethanol.

The deal could signify the US administration’s willingness to settle at the lower end of its tariff range and serve as a blueprint for future agreements with Japan, India, Israel and South Korea.

Meanwhile, economic activity data remains robust. China’s composite purchasing managers’ index (PMI) stayed in expansion territory,^[5] and April export growth was 8.1% year-on-year, above expectations.^[6] While exports to the US fell by 21%, this was more than offset by increased shipments to Asia and Europe.

Similarly, euro area and US composite PMIs exceeded expectations. In the Eurozone, the composite PMI rose to 50.4,^[7] with both manufacturing and services sub-indices beating forecasts, while the same was true in the US.^[8] Better-than-expected activity is reflected in economic surprise indices, with China and the euro area consistently beating forecasts, while US data is roughly in line (See ‘Chart of the Week’).

Out of sync

It was also a valuable week for insights from central banks, as ten monetary policy committees met for the first time since Liberation Day. There was limited synchronization: five central banks eased policy, one raised interest rates, and the remaining four held steady.

In the loosening camp, the surprise came from Peru, which unexpectedly cut policy rates by 25 basis points to 4.50%.^[9] The central bank cited downside risks to growth and inflation, driven by weakening demand following US tariffs.

China’s main financial regulators, the People’s Bank of China, China Securities Regulatory Commission and the National Financial Regulatory Administration, held a joint press conference on May 7 to unveil measures aimed at stabilizing growth and bolstering sentiment amid the unprecedented tariff shock.^[10] Key steps included a 10 basis points (bps) policy rate cut, a 25bps reduction in both the relending and pledged supplementary lending rates, a 50bps reserve requirement ratio cut, the introduction of new relending facilities to support consumption and innovation, and additional measures to aid the housing market and exporters.

Meanwhile, hawkish rate cuts were delivered by central banks in UK, Czechia and Poland. The Bank of England’s 25bps cut to 4.25% was expected, but the monetary policy committee vote was unusually split three ways: five members supported a 25bps cut, two called for a 50bps cut, and two preferred to keep rates unchanged.^[11] The overnight interest rate swap market continues to price in quarterly 25bp cuts, projecting a terminal policy rate of 3.5% being reached by next spring.^[12]

The US Federal Reserve was the one major central bank to leave its key policy rate unchanged. The Federal Open Market Committee voted unanimously to hold rates at 4.25%–4.50%.^[13] Notably, the Committee updated its policy statement to acknowledge that “the risks of higher unemployment and higher inflation have risen”. The Fed now sees increasing danger from cost-push inflation, particularly stemming from the impact of higher tariffs.

As a result, the Fed is expected to remain on hold until September. Meanwhile, the overnight interest swap market implies that the terminal policy rate under the new administration is around 3.50%, 50bps higher than projections under the Biden administration.

Brazil was the only central bank to tighten policy, raising the Selic rate by 50 basis points to 14.75%—its highest level since 2006.^[14] The central bank signalled this could mark the terminal peak of the current tightening cycle. The move effectively concludes a largely self-inflicted policy episode, driven by poor government communication and a delayed response to fiscal pressures. With real interest rates now above 9% and an undervalued currency supported by the commodity upcycle, Brazilian assets are beginning to attract renewed investor interest.^[15]

Chart of the Week: Economic surprise indices show little sign of slowdown.

Source: Citigroup, US, Eurozone, China Economic Surprise Indices, as of May 9, 2025. For illustrative purposes only.

References

[1] Chicago Board Options Exchange, Volatility Index, as of May 9, 2025.
[2] Reed Smith, Trump 2.0 tariff tracker, as of May 9, 2025.
[3] CNBC, ‘The US and China are set for icebreaker trade talks – here’s what to expect,’ May 9, 2025.
[4] GOV.uk, ‘Landmark economic deal with United States saves thousands of jobs for British car makers and steel industry,’ May 8, 2025.
[5] Trading Economics, China Composite PMI, May 8, 2025.
[6] General Administration of Customs PRC, China's Total Export & Import Values by Country/Region, April 2025 (in USD), May 9, 2025.
[7] S&P Global, HCOB Eurozone Composite PMI, May 6, 2025.
[8] S&P Global, US Composite PMI, May 5, 2025.
[9] BCRP, Monetary Policy Statement, May 8, 2025.
[10] State Council PRC, ‘China announces fresh policy boost to fuel economic recovery,’ May 7, 2025.
[11] Bank of England, ‘Bank rate reduced to 4.25%,’ May 8, 2025.
[12] Bloomberg, World Interest Rate Probabilities, as of May 9, 2025.
[13] Federal Reserve, FOMC decision, May 7, 2025.
[14] Banco Central do Brasil, ‘COPOM increases Selic rate to 14.75%,’ May 7, 2025.
[15] Bloomberg, ‘BCB language suggest latest hike is the last,’ May 8, 2025.

Past performance is not a reliable indicator of current or future results

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of May 12, 2025, and may change without notice. All data figures are from Bloomberg, as of May 9, 2025, unless otherwise stated.

--------

Important Information

Muzinich & Co.”, “Muzinich” and/or the “Firm” referenced herein is defined as Muzinich & Co. Inc. and its affiliates. This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability, heightened pricing volatility and reduced market liquidity. Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only. Any forward-looking information or statements expressed in the above may prove to be incorrect. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Muzinich gives no undertaking that it shall update any of the information, data and opinions contained in the above.

United States: This material is for Institutional Investor use only – not for retail distribution. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC.

Issued in the European Union by Muzinich & Co. (Ireland) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland, Company Registration No. 307511. Registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom. 2025-05-09-16101