Stocks tick up but what now??? TPP weekend wrap.

No bad news keeps stocks ticking up.

Trade escalations, de-escalations, and then re-escalations, seem to be the norm now. Most of our traders have accepted this and are taking it in their stride. Until something happens which has a predictable long-term impact, life will carry on.

London equities ended the week on a positive note, with the FTSE 100 index rising 0.3% to close at 8,837.91 points and the FTSE 250 advancing 0.42% to 21,157.28 points. This performance helped the FTSE notch up a solid 0.75% gain for the week. In currency markets, sterling showed mixed results, declining 0.28% against the dollar to trade at $1.3532 while gaining 0.13% against the euro at €1.1873.

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Europe

Across the channel, European markets delivered strong performances as the pan-European STOXX Europe 600 Index ended 0.90% higher, buoyed by slowing inflation and the European Central Bank's monetary policy easing. Strong U.S. jobs data also helped allay recession fears, contributing to broad-based gains across major European indexes. Germany's DAX surged 1.28%, Italy's FTSE MIB matched that gain with a 1.28% increase, and France's CAC 40 Index added 0.68%.

The European Central Bank delivered the widely expected quarter-point cut to its deposit rate, lowering it to 2% - the lowest level since 2022. Only one policymaker dissented from the decision. ECB President Christine Lagarde indicated that the central bank had "nearly concluded" its current policy cycle, which has included eight rate cuts since July 2024.

She emphasised that the current stance was in a "good place" and that future decisions would continue to be data-dependent rather than following a "pre-set path." Financial markets are pricing in the possibility of one more rate reduction, likely in September, as the ECB weighs trade policy uncertainty against growth and inflation risks.

Eurozone economic data also showed surprising strength in the first quarter. The final GDP reading revealed that the economy expanded 0.6%, double Eurostat's initial estimate and marking the fastest growth since the third quarter of 2022. Strong performance in Ireland and upward revisions to German data drove this improvement. Meanwhile, inflation continued its downward trend, with headline annual inflation in the eurozone slowing to 1.9% in May from 2.2% in April as energy and services prices receded. Core inflation, which excludes volatile energy and food prices, also fell to 2.3% from 2.7%.

However, industrial production data from Germany and France painted a more mixed picture. German industrial output contracted 1.4% in April after rising 2.3% the previous month, reflecting weakening exports. Manufacturing orders provided some relief, increasing 0.6% instead of the predicted 2.2% decline, supported by strong domestic demand. French industrial output similarly declined 1.4%, down from a 0.1% increase in March, with manufacturing leading the decline with a 0.6% drop.

The U.S.

In the United States, major stock indexes closed higher for the second consecutive week, with small-cap stocks leading the charge. The Russell 2000 Index gained an impressive 3.19%, while the Nasdaq Composite advanced 2.18% and the Dow Jones Industrial Average rose 1.17%, joining the S&P 500 Index in positive territory for the year. Information technology stocks outperformed at the sector level, benefiting from positive sentiment around artificial intelligence-related companies following several upbeat corporate earnings reports. The announcement that Meta Platforms had entered a 20-year contract with Constellation Energy to power its AI operations further boosted sentiment in the space.

The week's economic highlight came from Friday's closely watched nonfarm payrolls report, which suggested the labour market is cooling but at a more measured pace than many had anticipated. The Labour Department reported 139,000 jobs added in May, down from April's downwardly revised reading of 147,000 but exceeding consensus estimates of 130,000. The unemployment rate remained steady at 4.2%, staying within the 4.0% to 4.2% range it has occupied since May 2024. Both stocks and Treasury yields rose following the release, as markets interpreted the data as supportive of continued economic resilience.

Manufacturing activity, however, showed continued weakness, with the Institute for Supply Management reporting that U.S. manufacturing contracted for the third consecutive month in May. The PMI reading of 48.5% fell short of estimates for 49.5% and marked the lowest reading since November, with readings below 50% signalling contraction.

Asia

Asian markets presented a mixed picture during the week. Japanese stock markets declined, with the Nikkei 225 Index down 0.59% and the broader TOPIX Index losing 1.15%. Bilateral trade talks between the U.S. and Japan failed to produce an apparent agreement, though the discussions reinforced preparation for a potential announcement at the June G7 summit. The yen remained broadly unchanged from the prior week at around the JPY 144 level against the U.S. dollar.

Japanese economic data showed household spending fell 0.1% year-on-year in April, down from a 2.1% rise in March and below consensus estimates for a 1.4% gain. Real wages declined 1.8% year-on-year in April, weaker than expected, as inflation continued to outpace employer wage increases.

Mainland Chinese stock markets advanced as weaker-than-expected economic indicators raised hopes for additional government stimulus. The onshore CSI 300 Index added 0.88% and the Shanghai Composite Index rose 1.13% in local currency terms. Hong Kong's Hang Seng Index performed even better, gaining 2.16%.

The optimism for stimulus was supported by concerning manufacturing data from China. A private survey revealed that China's manufacturing sector suffered its biggest decline since September 2022, reflecting the impact of U.S. tariffs on smaller exporters. The Caixin manufacturing PMI fell to 48.3 in May from April's 50.4 reading, trailing economists' forecasts and dropping below the 50 mark that separates growth from contraction. The services sector provided some offset, with the Caixin services PMI rising to 51.1 in May from 50.7 in April. The manufacturing contraction reinforced views that Beijing needs to implement additional consumption incentives to offset the impact of U.S. tariff increases.

The Week Ahead - Market Focus

The coming week will see markets closely watching inflation updates from the US alongside GDP and labour market data from the UK, trade and CPI statistics from mainland China, plus eurozone production and trade figures. These releases come at a critical juncture as central banks navigate diverging economic conditions across major economies.

Following a below-consensus ADP private sector payrolls report, President Trump has intensified pressure on Fed Chair Jerome Powell to cut interest rates, pointing to the series of cuts already implemented by the European Central Bank. The ECB has reduced rates seven times since they peaked in late 2023, delivering a total of 175 basis points of cuts compared to just 100 basis points in the US. While eurozone rates have been trimmed three times already in 2025, US rates have remained on hold, creating a notable policy divergence.

This difference in monetary policy approach reflects the contrasting economic conditions facing the two regions. Although both the US and eurozone have encountered weakening demand that would typically encourage looser monetary policy, the US economy has demonstrated encouraging resilience that has helped allay recession concerns. More significantly, there has been a stark difference in inflation pressures between the two economies that has shaped their respective policy responses.

The eurozone is currently experiencing disinflationary forces driven by multiple factors, including lower energy prices, weak demand, cooling wage pressures, and the diversion of trade flows away from the US to avoid Trump's tariffs. These tariffs have created a contrasting dynamic in the US, where a combination of worrying inflation drivers has resurfaced, unnerving policymakers who remain cautious following the pandemic's inflationary supply shock.

Survey data from purchasing managers illustrates this divergence clearly. PMI respondents in the US have reported that suppliers are hiking prices due to both tariff-related supply shortages and the direct impact of tariff price increases. This has led to the largest rise in prices charged by US companies for their goods and services since September 2022. Conversely, eurozone companies have reported improved supply availability, which has encouraged discounting and resulted in one of the smallest price increases seen since the pandemic began.

The eurozone's PMI prices index has fallen to a level consistent with inflation below the ECB's 2% target in May, marking the fourth time in nine months that this threshold has been reached. Current eurozone inflation of 1.9% aligns with these PMI readings, supporting the case for continued monetary easing. The equivalent price index for the US tells a different story, indicating inflation running well above the Fed's target and suggesting limited scope for rate cuts.

Whether these survey-based price pressures in the US translate into actual higher CPI readings will be a key focus for markets in the coming week. The inflation data will provide crucial insight into whether the Federal Reserve has room to lower rates despite political pressure to stimulate growth, or whether rising price pressures will force policymakers to maintain their current cautious stance. This divergence between US and eurozone inflation trends continues to shape the global monetary policy landscape and will likely influence market expectations for the remainder of 2025.

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Disclaimer: The views expressed in this article are the author’s own and should not be considered in rendering any legal, business or financial advice. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions.

This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only.

Past performance may not be indicative of future results. Therefore, you should not assume that the future performance of any specific investment or investment strategy will be profitable or equal to the corresponding past performance.

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