Despite lingering concerns around high U.S. debt levels and economic uncertainty, markets ended the week on a relatively positive note. The U.S.-China trade truce provided some relief to investors, though analysts caution the tariff impacts are far from over.

Markets Retain Recent Gains, But Nerves Remain

U.S. stocks flirted with entering bull market territory, with the S&P 500 closing just shy of the 20% gain threshold. Japan led the way, up 2%, despite or perhaps due to there being very little news. Despite the rally, concerns about U.S. debt levels, persistent inflation, and patchy global economic data have continued to dominate headlines and weigh on sentiment. This suggests that short coverings, fund repositioning and momentum have been influential in recent weeks.

Credit Downgrade Adds to Pressure

As a case in point the week started on shaky footing after ratings agency Moody's stripped the U.S. of its coveted triple-A credit rating late Friday, citing rising government debt-to-GDP levels. This sparked a sell-off in U.S. Treasuries on Monday, with the 30-year yield spiking to 5.04%, its highest since November 2023, before retreating.

Debt and Deficit Worries Mount

Compounding debt concerns, a congressional budget committee narrowly passed President Trump's expansive tax cut and spending bill on Sunday. Analysts warn this could add trillions to the federal deficit over the next decade. The U.S. dollar slid 0.7% on the news.

Economic Data Disappoints

Dour economic data tempered optimism and U.S. consumer sentiment plunged to near record lows in May on inflation fears. China's retail sales and industrial output figures also disappointed, indicating their anticipated pivot to domestic-driven growth remains elusive.

Tariffs Still Weigh on Business

Meanwhile, companies are still grappling with the fallout from Trump's erratic trade policies. Despite the pullback in U.S.-China tariffs, average U.S. duties remain almost 8 times higher than when Trump took office. Big retailers like Walmart are warning of more price hikes to come as inventories of pre-tariff goods dwindle.

Small businesses are reeling. Game maker Stonemaier Games said it's slashing holiday production, while beer specialist The Brew Shop lamented that cost-sensitive customers may balk at further price increases. Others worry the President's tax cuts won't deliver the promised economic boost.

Mixed Signals from Corporate Earnings

In corporate news, Facebook parent Meta's shares dropped after the company again delayed the launch of its new Behemoth AI model compounded fears that the rate of progress in US AI tech could be slowing. Boeing got a lift after Qatar Airways announced a major new order seemingly influenced by Trumps visit to the region, giving some credence to the notion that 'deals are being done' in the US national interest.

RBA Cuts Rates

The Reserve Bank of Australia (RBA)  cut short-term cash rates today by 25 basis points, or a quarter of a percent, as was widely expected by the market. However, it was the accompanying commentary from RBA official Michelle Bullock that moved markets, as she expressed a more pessimistic outlook on the Australian economy. Bullock hinted at risks to economic stability that the market may be underestimating. Following her remarks, market pricing shifted to imply expectations for an additional rate cut sometime in the next 18 months, which would bring the cash rate down to around 1%.

Investors are now eyeing a slew of economic data and central bank meetings in the week ahead for more insights into the fragile global recovery. While the worst of the recent trade chaos may have passed, markets aren't ready to sound the all-clear just yet. Much depends on whether the recent U.S. debt downgrade and fiscal profligacy starts to more meaningfully undermine confidence in the world's largest economy.