KUWAIT: This week, financial markets experienced notable shifts influenced by easing inflation data, a temporary US-China tariff truce, and evolving expectations for Federal Reserve policy. The US Dollar Index experienced modest fluctuations, trading around 100.98 by week’s end. Early optimism from a US-China trade truce buoyed the dollar, but softer inflation data and slowing retail sales tempered gains, keeping the DXY relatively flat for the week. Gold prices declined notably, with spot gold falling approximately 3.3 percent, marking the steepest weekly drop since November 2024.

The decrease was driven by reduced safe-haven demand amid easing trade tensions. Meanwhile, US equity markets posted strong gains, with the S&P 500 nearing its February record high. The rally was fueled by easing inflation concerns, and optimism over trade negotiations. Finally, Moody’s downgraded US credit rating from AAA to Aa1, citing elevated government debt, high interest payments, and political dysfunction.

US, China lower tariffs

Global stock markets jumped on Monday after the US and China agreed to pause their trade war for 90 days by cutting tariffs. On the week, the S&P 500 surged 5.3 percent, erasing all its losses for 2025, whilst the Nasdaq Composite rose 7.2 percent. DXY strengthened 1.5 percent—its largest single-day gain since November 2024. The US will lower taxes on Chinese goods from 145 percent to 30 percent, and China will reduce its taxes on US imports from 125 percent to 10 percent. China also agreed to ease limits on rare earth minerals, which are key for tech products.

However, key problems remain unsolved, like the trade gap between the two countries and US requests for China’s help in stopping the fentanyl problem. While President Trump said the deal shows his strong trade policies are working, critics claim the US backed down by lowering its tariffs. Businesses were happy about the pause but asked for clearer long-term plans, with experts warning that 90 days isn’t enough to fix bigger issues like China’s subsidies. Existing tariffs on electric cars, solar panels, and older taxes stay in place, which could keep prices high for consumers. Experts believe that fixing the US-China trade dispute will take years, not months, showing this break might not last.

Moody’s downgrade

Moody’s has downgraded the United States’ credit rating from AAA to Aa1, ending the country’s last perfect rating among the major agencies, following similar moves by S&P in 2011 and Fitch in 2023. The downgrade reflects rising government debt, increasing interest payments, and growing political dysfunction, including last summer’s near-default and congressional gridlock. While Moody’s now sees the US as slightly less creditworthy, it maintains a “stable” outlook due to strong institutions and an independent Federal Reserve.

The Trump administration has responded with plans to cut spending and pass the “One Big Beautiful Bill,” which includes major tax cuts and safety net reductions. However, analysts warn that the bill would add $3.3 trillion to the debt over a decade, worsening deficits that are projected to grow from $1.8 trillion in 2024 to $2.9 trillion by 2034. The downgrade may lead to higher interest rates across the economy, affecting mortgages, loans, and global contracts tied to US Treasuries.

CPI inflation cools

US inflation cooled more than expected in April, dropping to 2.3 percent, its lowest rate since February 2021, despite concerns that President Trump’s aggressive tariffs would drive prices up. Monthly inflation rose just 0.2 percent, below forecasts of 0.3 percent. While some goods categories did show early signs of tariff-related price increases—such as furniture and electronics—these were offset by weaker services inflation, likely due to declining consumer demand. The core CPI, excluding food and energy, also rose 0.2 percent, holding steady at 2.8 percent year-over-year. Although tariff effects were still limited in this data, early signs of price pressure in goods are emerging. Despite inflation nearing the Federal Reserve’s 2 percent target, the Fed remains cautious, especially given Trump’s broader trade and fiscal policies. Markets now anticipate two rate cuts by the end of the year.

PPI inflation declines

Producer prices in the US unexpectedly dropped by 0.5 percent in April—the largest decline in five years—mainly due to shrinking profit margins, as companies absorbed rising costs instead of passing them on to consumers. Core PPI, excluding food and energy, fell 0.4 percent, the sharpest drop since 2015, while a broader core measure also declined for the first time in five years. Year-over-year, producer prices were up 2.9 percent. The data suggests that businesses, facing steep tariffs and uncertain policy shifts, are choosing to absorb higher import costs to avoid weakening consumer demand for now.

Retail sales

US retail sales growth slowed significantly in April, rising just 0.1 percent following a strong 1.7 percent gain in March, as the earlier boost from pre-tariff vehicle purchases faded and consumers cut back amid economic uncertainty. Core retail sales—which exclude autos, gas, building materials, and food services and closely align with GDP consumer spending—fell 0.2 percent after a 0.5 percent increase in March. Year-over-year, overall retail sales were up 5.2 percent. While some categories like food services (+1.2 percent), building materials (+0.8 percent), and electronics (+0.3 percent) saw gains, others, such as sporting goods (-2.5 percent) and miscellaneous retailers (-2.1 percent), experienced sharp declines.

Jerome Powell speaks

Federal Reserve Chair Jerome Powell said the Fed is reassessing its approach to monetary policy due to the evolving economic landscape, marked by recent inflation and the growing likelihood of more frequent supply shocks. Speaking at a policy review conference, Powell noted that conditions have changed significantly since the Fed’s 2020 framework was adopted during the pandemic. He emphasized the need to adapt to potential long-term challenges from persistent supply disruptions. While avoiding comments on current policy, Powell mentioned he expects April’s core PCE inflation to slow to 2.2 percent, though this may not yet reflect future tariff-related price pressures.

US consumer sentiment declined for the fifth consecutive month in May, falling 2.7 percent to 50.8—the lowest level since July 2022—as concerns over inflation linked to President Trump’s trade war continued to weigh on public confidence. Since January, sentiment has dropped nearly 30 percent, with many Americans pessimistic about the economic outlook following the administration’s steep import tariffs. While the White House recently eased some of the most aggressive measures, average tariff levels remain historically high. The greenback was last seen trading at 100.98.

UK GDP expands

The UK economy grew by 0.7 percent in the first quarter of 2025—the fastest pace in a year—outperforming expectations as businesses accelerated investment and exports ahead of US tariffs announced by President Trump. This strong start followed a modest 0.1 percent expansion in the previous quarter. Growth was driven by broad gains in the service sector, particularly in retail, IT, car leasing, and advertising, while production rose 1.1 percent and construction stagnated. Economists warned, however, that this momentum may not last due to policy uncertainty and looming tariff effects. A key contributor to Q1 growth was a surge in business investment in aircraft, IT, and machinery, along with a 3.5 percent jump in exports, which helped offset recent trade weakness and added 0.4 percentage points to GDP.. The GBP/USD currency pair was last seen trading at 1.3272.

China loans

China’s new bank lending dropped sharply in April, falling well below expectations as the ongoing trade war with the US weakened credit demand. Banks issued just 280 billion yuan in new loans—down drastically from March’s 3.64 trillion yuan—marking the slowest lending month this year. The annual growth rate of outstanding yuan loans also slowed to a record low of 7.2 percent.

Lending typically dips in April due to early-year front-loading, but this decline was compounded by eroding borrower confidence amid a deepening property crisis, local government debt, and deflation concerns. Household loans, including mortgages, fell by over 500 billion yuan, while corporate lending also declined sharply. Despite stronger-than-expected Q1 economic growth and a 5 percent annual growth target, analysts warn that escalating tariffs could derail momentum. In response, China’s central bank has rolled out stimulus measures, including rate cuts and liquidity support, to counter the effects of the trade tensions. The USD/CNY currency pair was last seen trading at 7.2090.

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