Muzinich Weekly Market Comment: Ripple effects
Insight
June 9, 2025
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In our latest roundup of the key developments in financial markets and economies, we look back on a big week for economic data, which revealed much about the impact of US tariffs.
Across the globe, governments and corporations are taking various steps to counter the effects of US reciprocal tariffs. Some countries, like China, are digging deep into their financial toolkit in an effort to lessen the impact.
Last week, investors took a keen interest in the latest Chinese manufacturing data for signs of tariff-related strain. The official manufacturing Purchasing Manager’s Index (PMI), which primarily reflects activity among state-owned enterprises, edged up to 49.5 in May from 49.0 in April, aligned with expectations but remaining in contraction.[1]
In contrast, the Caixin manufacturing PMI, which is more representative of privately owned firms, plunged to 48.3, its lowest level since September 2022.[2] With both indices now firmly in contraction, the drag from US tariffs is becoming increasingly evident.
Stepping up
Against this backdrop, it is no surprise that the Chinese government is stepping up its support. In the first four months of 2025, government spending reached its highest level in at least a decade. The consolidated budget deficit rose to 2.7 trillion yuan by April, representing 22.4% of the full year target.[3] At the same time, China’s Loan Prime Rates (LPR) remain at record lows. The 1-year LPR, which serves as the benchmark for most new and outstanding loans, stands at 3.0%, while the 5-year LPR, primarily used for mortgages, is 3.5%.[4]
The combination of expanded fiscal spending and historically low interest rates reinforces our view that monetary and fiscal stimulus are being actively and forcefully deployed to support domestic demand. Reflecting this, Bloomberg’s consensus median growth forecast for China in 2025 has increased from a low of 4.2% in April to 4.5%.[5] We expect upward revisions to continue provided there is no renewed escalation in the US-China trade dispute.
On that front, optimism picked up toward the end of last week following a 90-minute call between President Trump and President Xi, which appeared to break the impasse on critical minerals and other pressing issues, paving the way for renewed trade talks. Trump acknowledged that the US-China trade relationship had gotten “a little off track,” but now, “we’re in very good shape with China and the trade deal”.[6]
Last cut?
In Europe, investors eagerly awaited the updated European Central Bank (ECB) staff projections, the first since March, which came before Liberation Day. The ECB opened the meeting by cutting its deposit rate by 25 basis points to 2%, its eighth cut in the past 12 months.[7] The decision was driven by easing inflation – May’s Eurozone consumer price index came in below expectations at 1.9%, the first sub-2% reading in four years[8] – as well as mounting economic pressures from tariffs.
Under the ECB’s baseline scenario, US tariffs on EU goods are expected to remain at 10% throughout the projection period.[9] The scenario assumes heightened trade policy uncertainty and a strong euro as key factors weighing on growth. However, economic activity is expected to be cushioned by rising real wages, employment gains, and less restrictive financing conditions.
Additionally, increased government spending on infrastructure and defence, particularly in Germany, is expected to support a gradual recovery in 2026. Last week, the German government announced plans to pass a €46 billion package of corporate tax breaks over the summer to help lift the Eurozone’s largest economy out of stagnation.[10]
As a result, the ECB staff largely maintained its growth projections from March. Forecasts for 2025 and 2027 remain unchanged at 0.9% and 1.3%, respectively, while the 2026 projection was revised down slightly by 0.1 percentage points to 1.1%. The central bank also expressed confidence that underlying inflation is on track to converge with its 2% medium-term target. In the June projections, inflation forecasts for 2025 and 2026 were revised down by 0.3 percentage points to 2% and 1.6%, respectively, before rebounding to 2% in 2027 (see Chart of the Week).
Addressing reporters, ECB President Christine Lagarde said monetary policy is “in a good position to navigate the uncertain conditions” and noted the central bank is “getting to the end of a monetary policy cycle”.[11]
The ECB is now firmly data-dependent, with the September staff projections likely to serve as a key indicator for whether a pause in rate cuts or further easing will follow. Market pricing, as reflected in overnight interest rate swaps, suggests one additional 25 basis points cut to end the cycle.[12]
Jobs and tariffs
In the US, trade and employment developments dominated investor attention. The week began on a negative note with news that tariffs on imported steel and aluminium will increase to 50%, although the UK is exempt.[13] The move is expected to hit America’s closest trading partners hardest – particularly Canada, the largest supplier of both metals to the US.
Meanwhile, the US Treasury’s latest currency report concluded that no major trading partner met the criteria for currency manipulation in the four quarters through December.[14] However, the monitoring list was expanded to nine economies, with Ireland and Switzerland added, joining Germany, China, Japan, South Korea, Singapore, Taiwan, and Vietnam. In response, the Swiss National Bank (SNB) stated: “The SNB does not engage in any manipulation of the Swiss franc.”[15]
April’s US trade report gave investors the clearest sign yet of the impact of reciprocal tariff measures. The trade deficit narrowed sharply to US$61.6 billion, its lowest level since September 2023, down from US$138.3 billion in March.[16] This was driven by a record 16.3% decline in imports, particularly pharmaceuticals, industrial supplies, vehicles, and capital equipment, alongside a 3% rise in exports. The goods-trade deficit with Ireland shrank to US$9.5 billion (from US$29.3 billion), while the gap with China narrowed to US$19.7 billion.
Since lower imports mechanically boost GDP, Q2 growth projections have surged - with the Atlanta Fed’s GDPNow model forecasting 3.8% annualized growth.[17]
A series of soft labour reports set a cautious tone ahead of the critical Nonfarm Payrolls (NFP) release. The Job Openings and Labor Turnover Survey report showed an increase in layoffs and decline in the quits rate, suggesting workers are finding it harder to secure new jobs.[18] This was followed by the ADP private-sector payrolls, which rose by just 37,000, marking the slowest rate of job creation in two years, falling significantly short of estimates.[19]
Meanwhile, the weekly initial jobless claims climbed to 247,000, the highest level in over a year.[20] As for the NFP report, the headline figures offered some relief, with payrolls rising 139,000, above expectations, while the unemployment rate held steady at 4.2%.[21]
However, the underlying details were less encouraging. Job growth moderated in May, and previous months' figures were revised lower. The household survey, which feeds into the unemployment rate, showed a 254,000 increase in the number of people moving from employment to unemployment, the largest jump since early 2022. At the same time, the labour force participation rate fell to 62.4%. This suggests unemployment remained steady for the wrong reasons – not due to robust job creation, but because more workers exited the labour force.
Setting the tone
The first week of the month is often pivotal in setting the tone and direction for asset prices, as it brings a wave of key economic data and central bank announcements that prompt investors to adjust their expectations. Decoding this influx of information is always a challenge, but it has become particularly tricky in 2025 given the unusually high degree of transparency and noise surrounding the inner workings of the US administration.
However, if we use last week’s price action as a filter, several trends are apparent. Investor sentiment remains constructive: global equities have recovered strongly since Liberation Day-induced weakness in April; high-yield credit is outperforming investment grade; and growth concerns are fading, as reflected in rising commodity prices and the outperformance of emerging market currencies versus their developed market peers.
In interest rate markets, Eurozone and US government yield curves have bear-flattened, signalling central banks are likely to remain on hold for now, although they remain committed to anchoring inflation expectations. Meanwhile, continued weakness in the US dollar against global currencies suggests investors view the US as the region facing the most uncertainty and possibly the most likely driver of any softness or correction in asset prices in the coming months.
Chart of the Week: No sign of economic pressure in the Eurozone (annual % change)
Source: European Central Bank, Macroeconomic Projections, as of June 05, 2025. For illustrative purposes only.
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 June 9, 2025, and may change without notice. All data figures are from Bloomberg, as of June 6, 2025, unless otherwise stated.
References
[1] National Bureau of Statistics of China, PMI May 2025, June 6, 2025
[2] Caixin, PMI May 2025, June 4, 2025
[3] Ministry of Finance of the People's Republic of China, Fiscal Balance, Jun 6, 2025
[4] People’s Bank of China, Loan Prime Rates, as of June 6, 2025
[5] Bloomberg, Economic Forecasts, as of June 6, 2025
[6] Bloomberg, ‘Trump, Xi Agree to More Trade Talks as Rare Earths Dispute Cools,’ June 5, 2025
[7] ECB, Monetary Policy Decisions, June 5, 2025
[8] Eurostat, Inflation in the euro area, June 3, 2025
[9] ECB, Macroeconomic Projections, June 5, 2025
[10] Financial Times, ‘Friedrich Merz plans €46bn corporate tax breaks to revive German economy,’ June 4, 2025
[11] ECB, Monetary policy statement (with Q&A), June 5, 2025
[12] Bloomberg, World Interest Rate Probabilities,’ as of June 6, 2025
[13] The White House, ‘Adjusting imports of aluminum and steel into the United States,’ June 3, 2025
[14] US Treasury, ‘Treasury Releases Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States,’ June 4, 2025
[15] Bloomberg, ‘Swiss See No Threat to US Trade Talks From Treasury Watchlist,’ June 6, 2025
[16] US Bureau of Economic Analysis, ‘U.S. International Trade in Goods and Services,’ June 5, 2025
[17] Atlanta Fed, GDP Now, as of June 5, 2025
[18] Bureau of Labor Statistics, JOLTS report, June 3, 2025
[19] ADP, Employment Report,’ June 4, 2025
[20] Department of Labor, Unemployment Insurance Weekly Claims, June 5, 2025
[21] Bureau of Labor Statistics, Employment situation summary, June 6, 2025
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