Charts of the Week: Markets Rally, Risks Linger

Uncertainty and market volatility Our first chart this week illustrates how both market volatility and economic policy uncertainty have started to ease following the sharp spikes seen earlier in 2025. The VIX has steadily declined in recent weeks, returning to levels closer to its long-term average as investors take comfort from stronger-than-expected US data, a steady disinflation trend, and renewed optimism around global trade. While the news-based policy uncertainty index remains elevated compared with historical norms, it too appears to be trending down, suggesting that the initial shock from tariff hikes and trade policy shifts is beginning to settle.

The US dollar, US yields and Fed independence This next chart highlights the marked decline in the broad nominal effective exchange rate of the US dollar since early 2025, alongside a modest drift lower in 10-year Treasury yields. While Treasury yields remain elevated by historical standards—hovering just above 4.3%—they have failed to sustain the highs seen earlier this year, partly perhaps because inflation has continued to moderate. At the same time, the dollar has depreciated steadily, partly reflecting growing market unease around the Federal Reserve’s policy credibility and institutional independence. Recent comments by President Trump, openly criticising Chair Jerome Powell, have reinforced investor concerns about political pressure on the Fed at a time when policy decisions are finely balanced.

Japan’s trade with the US While the recent US–Japan trade agreement has helped soothe immediate tensions, the underlying economic relationship remains fragile. As this next chart shows, trade policy uncertainty in Japan has spiked sharply in recent months—reaching levels not seen since the height of global trade disruptions in 2020—even as exports to the US have begun to soften again. Though the agreement offered short-term relief for Japan’s auto and machinery sectors, many key details remain vague, especially surrounding the much-publicised $550 billion investment commitment.

Credit growth in the euro area Latest data for June published this week show a clear slowdown in euro area M3 growth, with a notably softer contribution from private sector lending. After supporting the recovery over the past year, credit to households and firms is now losing momentum. This comes despite recent upside surprises in Q2’s GDP (and the broader dataflow), suggesting the recovery may be less credit-driven than before.

The UK consumer This week’s latest CBI Distributive Trades Survey also paints a worrying picture for the UK consumer outlook. As shown in the next chart below, the balance of retailers reporting higher sales volumes compared to a year ago has fallen sharply, reaching levels consistent with past periods of economic stress. This sustained weakness in retail activity points to downside risks to UK growth, particularly given signs of slowing wage growth and softening labour market conditions.

The US housing market Finally, the latest reading from the S&P CoreLogic Case-Shiller Home Price Index shows a negative three-month change, marking a clear reversal in US house price momentum. As the chart below highlights, past periods of falling home prices have often coincided with or preceded recessions, as indicated by the shaded areas. This pattern underscores the housing market’s broader significance for the economy, particularly through its impact on household wealth, credit conditions, and construction activity. While other macro indicators remain solid, the recent downturn in prices is a potential early warning sign that housing-related pressures could weigh more heavily on the outlook in the months ahead.