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The Weekly Bottom Line

Our summary of recent economic events and what to expect in the weeks ahead.

Date Published: May 23, 2025

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Highlights

  • The U.S. House of Representatives passed its version of the reconciliation bill, which includes major tax cuts and expands the U.S. deficit over the next ten years. 
  • U.S. government bond yields moved up this week, likely due to a combination of the market response to higher deficits and expectations of higher inflation. 
  • Expectations for U.S. interest rates have moved higher this week, as data start to show signs of price pressures. 

One Big, Beautiful Deficit 


Chart 1 shows the U.S. 2-year, 10-year and 30-year government bond yield from 2008 to May 22, 2025. The 30-year government bond yield was near 5% but never above from 2008-2011, before it fell and remained lower until 2023. In recent days, it is above 5%. The chart also shows that the 10-year government bond yield was around 4% from 2008-2011, much lower until 2023 when it returned to 4%, and has been around 4.5% in recent days.

If we’ve got our eyes trained on one thing this week, it is the House of Representatives reconciliation bill, which has been officially dubbed the “One Big Beautiful Bill Act”. The bill still must go through the Senate and so nothing is set in stone, but early estimates show the bill in its current state could add over $3 trillion to the U.S. deficit over the next ten years. The main culprit behind the expanded deficits are the promised tax cuts, including the extension of President Trump’s 2017 Tax Cuts & Jobs Act in addition to several new tax breaks for households. These are paired with some spending cuts, but not enough to cover the tax cuts and added interest payments. The bond market has already started to show some reservations to the prospects of higher deficits, with term-yields pushing notably higher this week (Chart 1). The 2-year and 10-year government bond yields have also been backing up in the past few weeks, reflecting some increased premium on government bonds and higher rate expectations for the Federal Reserve.  These moves precede today’s threat from President Trump of even higher tariffs on the EU. 

Government bond yields aren’t the only thing heating up. We are also seeing early signs of a build-up in price pressures in recent survey data, including yesterday’s release of the Purchasing Manager Index (PMI) for April. These PMIs are surveys of industry that provide a timely indicator of business activity during the survey period and can also shed light on how prices fared. The April PMIs, shown in Chart 2, showed a large concurrent rise in input and output prices. We had expected that higher tariffs would have an impact on firms costs and their prices to consumers. Several large U.S. companies have been indicating that they will be increasing their prices, anecdotally confirming what the data is pointing to – that the U.S. is heading to a world of higher interest rates and prices. 

Chart 2 shows the PMI for input and output prices from 2023 to April 2025. These are index values based on a survey, where values above 50 indicate increases. The Input Price index increased from 58 to 63 in April, making it the highest it has been in over two years. The Output Price index increased from 54 to 59, also rising to the highest it has been in over two years.

The rise in government bond yields will be filtering through to the rest of the economy, and this will have an impact on consumers. We noted in our commentary yesterday that existing home sales took a hit in April and March. The housing market, already on weak footing, now has to contend with mortgage rates that have risen back above 7%, on the back of a higher U.S. Treasury yields. For those held back by current rates, interest rate relief may not be coming quickly for U.S. households. St. Louis Fed President Musalem, who is a voting member on the FOMC, said that monetary policy is in a good place, mirroring sentiment expressed in the last set of minutes that FOMC members are in a wait-and-see mode about inflation before cutting rates further. 

We look ahead to next week to see how the budget talks continue to unfold. The ball is now in the Senate’s court and since the bill was controversial among Republican House members, we do not take the Senate’s acquiescence to its current form as a given. Their stated goal is to have the bill passed by July 4, which gives Congressional Republicans and the White House time to iron out disagreements. On the data side, most important is the April personal spending and price data, which come at the end of next week and will be an early indicator of what impact April’s tariff increases had.

Vikram Rai, Senior Economist | 416-923-1692

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