Trade Tensions and Policy Crossroads: What Moved Markets This Week

The week of May 5–10, 2025, was defined by a perfect storm of global trade tensions, shifting central bank policies, and corporate cost pressures. Markets grappled with the dual challenges of tariff-driven inflation and economic divergence, as key data releases and geopolitical risks kept investors on edge. Below, we dissect the forces that reshaped portfolios and underscored the fragility of synchronized global growth.

Economic Indicators: A Tale of Two Sectors

The week began with a flood of PMI data, highlighting a stark divide between services and manufacturing sectors. Global Services and Composite PMIs (released May 5–6) pointed to resilient demand in consumer-facing industries, but manufacturing metrics remained distorted by tariffs. The US ISM Services PMI (May 7) revealed the starkest contrast: while services activity expanded, input costs for US producers surged to a two-and-a-half-year high, driven by tariff-induced supply chain pressures.

Meanwhile, the UK Construction PMI (May 8) plummeted to levels last seen during the 2022 mini-Budget crisis, underscoring sector-specific vulnerabilities. In Asia, China’s April trade data (May 9) showed export growth slowing to 5.1%, reflecting US tariff impacts, while Indonesia’s Q1 GDP (5.1%) and Philippines’ GDP (6.1%) provided rare bright spots in Southeast Asia.

Central Banks at a Crossroads

Central banks faced a balancing act: tame inflation or support growth? The US Federal Reserve held rates steady at 5.0–5.25% on May 7, prioritizing “data dependence” over immediate cuts despite a Q1 GDP contraction. The Fed’s reluctance to ease signaled its focus on tariff-driven inflation, which remains stubbornly elevated in sectors like manufacturing.

In contrast, the Bank of England (BoE) cut rates by 25 basis points to 4.25% on May 8, citing UK GDP contraction (0.5% in Q1) and escalating service-sector inflation. The decision highlighted the divergent pressures faced by economies exposed to trade wars: while the Fed can afford to wait, the UK must act to stave off recession risks.

Corporate Cost Pressures: The Tariff Toll

The week’s earnings updates revealed the human cost of trade conflicts. US firms reported the steepest price hikes in nearly two years, with manufacturers passing tariff costs to consumers—a trend that could crimp profit margins if demand softens. In Canada, tariffs caused a third straight month of factory job losses, with export orders collapsing by 4.2% in April.

The UK’s service sector faced its own crisis: National Insurance hikes and rising payroll costs forced companies to raise prices, complicating BoE’s inflation forecasts. Meanwhile, Malaysia’s industrial production (down 1.2% in April) and Taiwan’s trade data (exports down 2.8%) signaled broader manufacturing weakness in Asia.

Geopolitical Risks: The Elephant in the Room

Behind every data point loomed the specter of US trade policy. J.P. Morgan analysts warned that further tariff expansions or geopolitical conflicts under the Trump administration could exacerbate global divergence. The Fed’s reluctance to cut rates risks prolonging dollar strength, squeezing emerging markets already grappling with inflation and currency depreciations.

Strategic Takeaways

1. Services PMIs Will Drive Sentiment: Markets will lean on services data to gauge inflation resilience, as manufacturing metrics remain tariff-distorted.
2. Rate Divergence Fuels Volatility: The Fed’s high-for-longer stance versus potential Eurozone rate cuts below 2% will keep currencies and bonds in flux.
3. Policy Uncertainty is the Wildcard: Investors must price in the risk of escalating trade disputes or regulatory shifts in the US.

Conclusion

This week’s data underscored a critical truth: global growth is increasingly bifurcated. While the US and China navigate tariff-induced inflation, the UK and Eurozone face recession risks, and emerging markets grapple with weak exports and currency pressures.

The Fed’s hold and BoE’s cut reflect this divide—a divergence that could deepen if trade tensions persist. Investors should prioritize defensive sectors and currencies insulated from tariff impacts, while remaining vigilant to geopolitical triggers. As J.P. Morgan analysts noted, 2025’s outcomes hinge on one question: Can policymakers outpace the damage of their own policies?

The markets’ answer this week was clear: Not yet.