Markets and Economy

Central banks are treading carefully

May 12, 2025

Invesco Global Market Strategy Office

London financial district with historic Royal Exchange building and Bank of England, UK

Key takeaways

Markets are taking a significant de-escalation of US-China tariffs — down to 30% from 145% for 90 days — positively.

The Fed remains in wait-and-see mode as tariff uncertainty has resulted in upside price risks downside employment risks.

The BOE cut interest rates but also struck a hawkish tone because the vote to cut was closer than anticipated.

The 2018 trade conflict between the US and China has felt like an apt analogy to the current environment. By late 2018, business sentiment deteriorated,¹ recession concerns rose, and the S&P 500 Index sold off by nearly 20% in a short period.² By the time investors had become increasingly bearish,³ the policy mix was changing. The Trump administration announced a 90-day tariff pause with China and the US Federal Reserve became increasingly more dovish. The following year was strong for risk assets.⁴

As the saying goes, history often rhymes. Over the weekend Treasury Secretary Bessent met with Chinese trade officials in Switzerland, and the result appears to be a significant de-escalation of tariffs — down to 30% from 145% for 90 days. Understandably, markets are taking this very positively. While tariffs are higher than last year, it’s a significant step down by the US administration from the worst-case scenario.

Here’s what else happened last week.

1. Fed: Remains in wait-and-see mode

The Fed remains stuck between a rock and a hard place. Uncertainty around tariffs has resulted in both upside risks to prices and downside risks to employment. Our sense is that the next move in rates should be lower, but until the labor market shows greater signs of weakness, we expect the Fed will hold rates where they are. Unemployment claims and payroll data have held up well in recent months. The push-pull between encouraging but backward-looking economic data and current sentiment data means the Fed is likely to remain in wait-and-see mode.

2. BOE: Gradually and carefully cutting

The Bank of England (BOE) cut its policy rate by 25 basis points last week as was widely expected, though the vote split was closer than anticipated with two members voting for no change.⁵Survey data have pointed to sticky inflationary pressures in the UK,⁶ but we expect lower oil prices, a stronger currency, and US tariffs will mean fewer inflationary pressures in the coming months. The UK labor market, while not collapsing, is showing signs of slack.⁷Rate cuts are gradually feeding through into lower mortgage rates, which could give the UK consumer more confidence to increase spending later this year. If that happens, we expect domestically focused small-cap UK stocks to potentially benefit.

3. Earnings season: Strong quarter, but guidance hard to give

First quarter earnings season is well underway with more than 75% of S&P 500 Index companies having already reported. Earnings results have largely surprised to the upside in line with the normal rate.⁸ Forward guidance from US companies, however, reflects heightened uncertainty. Many businesses have so far refrained from issuing negative earnings per share guidance, and mentions of recession during earnings calls have climbed sharply since last quarter. Mentions of layoffs, however, haven’t moved materially higher.

4. Tech: The usual suspects

A look under the hood reveals that the US technology and communication services sectors have led the stock market’s rally in recent weeks.⁹This marks a reversal from the first three months of the year, when poor performance in those sectors held the broader market back. Continued weakness outside of tech and communication services means that if the performance of those sectors were to slow again, the stock market’s recent rally could begin to stall.

5. Conflict in Kashmir isn’t meaningful for markets

Tensions between India and Pakistan are rising after the two countries engaged in their worst confrontations in decades. While there’s potential for further escalation, investors should remember that historically the impact of regional geopolitical conflicts on broad markets has tended to be muted. The Pakistan stock markets have sold off heavily,¹⁰ but we don’t expect these tensions to have a meaningful impact on broader financial markets.

What to watch this week

Region	Data release	Why it’s important
Monday	US federal budget Balance	Some market participants are concerned about the size of the US public debt. These figures will show whether debt growth is increasing or slowing. That can be meaningful for bond yields and term premia.
Tuesday	UK labour market data	Employment figures, wage growth, and claimant count data will be watched closely for weakness. The Bank of England has recently voiced worries that these data are softening, and further weakness could mean further rate cuts from it.
Tuesday	Germany ZEW indicator of economic sentiment	A signal of how German businesses expect growth, inflation, and other economic indicators to evolve over the coming six months. It’s a measure of business confidence.
Tuesday	US Consumer Price Index (CPI)	Inflation data is watched closely. If prices rise more quickly than in previous months, that may mean the next Fed rate cut is further away than the market expects. It will be the first indication of whether retailers are starting to pass on tariffs to consumers.
Thursday	Japan Bond and equity flows	Japanese demand for foreign assets will be noted as weakness in the USD, which may mean that Japanese investors prefer to keep money at home now compared to previous years.
Thursday	UK gross domestic product (GDP)	Has the UK economy managed to grow in Q1 and has growth accelerated? This data will provide an indication of which sectors of the UK economy are performing better than others.
Thursday	European Union (EU) GDP	Has the Eurozone economy managed to grow in Q1 and has growth accelerated? These data will provide an indication of which sectors of the EU economy are performing better than others.
Thursday	US retail sales	Will provide an indication of whether households are still spending and possibly trying to buy goods ahead of tariff price increases or whether demand is already slowing.
Friday	Japan GDP	Has the Japanese economy managed to grow in Q1 and has growth accelerated. This will provide an indication of which sectors of the Japanese economy are performing better than others.
Friday	US housing starts	Housing construction employs a meaningful portion of the US labor market. Rising housing starts are seen as a sign of improving economic activity.

1
Source: CEO Executive Magazine, based on the CEO Confidence Index, which is a monthly survey of chief executives. Each month, Chief Executive Magazine surveys CEOs across corporate America at organizations of all types and sizes to compile and create an index.
2
Source: Bloomberg L.P. The S&P 500 Index fell peak to trough by 19.8% from 9/20/18 to 12/24/18.
3
Source: Bloomberg L.P., bearish readings from July 2018-Dec. 2018, from the American Association of Individual Investors (AAII) Investor Sentiment Survey Sentiment, which offers insight into the opinions of individual investors by asking them their thoughts on where the market is heading in the next six months.
4
Source: Bloomberg L.P. The S&P 500 Index returned 31.5% in 2019.
5
Source: Bank of England, 5/9/25.
6
Source: Bank of England/Ipsos Inflation Attitudes Survey, 4/30/25.
7
Source: UK Office for National Statistics, 4/30/25.
8
Source: Bloomberg L.P., based on the companies in the S&P 500 Index.
9
Source: Bloomberg L.P., 5/8/25, based on the sectors of the S&P 500 Index. Since the week beginning April 14, the S&P 500 Information Technology sector and the S&P Communications Sector have returned 8.4% and 5.6%, respectively.
10
Source: Bloomberg L.P., 5/8/25, based on the return of the MSCI Pakistan Index (USD), which measures the performance of the large- and mid-cap segments of the Pakistan market, has fallen by 14.98% since 4/3/25.