Data Resilience Despite Policy Instability
Recent "soft data" surveys indicate a slight rebound in business and consumer sentiment as the administration paused some prospective tariffs.
Meanwhile, we view the resiliency in real economic activity as reflective of a pull-forward in demand to get in front of these looming tariffs, and our expectation is for economic growth to slow during the balance of 2025.
Businesses and consumers will need to share the burden of higher tariffs, and we expect margin pressure and softer demand to result. However, current labor market and inflation conditions support an on-hold Fed for now.
The Fed will likely not cut rates substantially until the labor market shows cracks or inflation drops back to 2%.
If the One Big Beautiful Bill Act (OBBBA) bill passes without meaningful spending cuts to offset stimulative tax policy, that puts more pressure on the Fed to remain in their current policy stance. Meanwhile, we expect monetary policy divergence over the balance of 2025 as other global central banks have more freedom to ease than the Fed.
3 Things to Know
A Cooling Labor Market
While the number of jobs added and the unemployment rate were largely unchanged in May, 200k individuals have left the workforce since January.
After heavy discussion earlier in the year around federal government job cuts, economists have shifted focus to a growing number of private sector layoff announcements, including those from major employers like UPS, Microsoft, Walmart, Starbucks, and Chevron.
So far, these anecdotes have yet to show up in hard data. We view the near-term benign labor market and temporarily stable inflation as supportive for an on-hold Federal Reserve, keeping policy rates elevated and supportive of our short-duration tilt in fixed income.
Issues to Watch as One Big Beautiful Bill Moves to Senate
Recently, the market has newly focused on an obscure set of potential new rules in the House-version of the bill called “Section 899”.
This section concerns potential taxation of foreign-owned investments in the US and adds to policy uncertainty for market participants. While we expect the Senate will revise these provisions in the face of heavy lobbying, we view the potential inclusion of this language as disruptive to global asset allocators’ optimal exposures to US assets and may cause further USD weakness.
Tariff Update
The recent US international trade court ruling against the use of IEEPA for tariffs encourages both market participants and trading partners to view end-state tariffs as far less severe in scope and scale than the market feared on April 2nd, even as reciprocal and sectoral tariffs may take many months to finalize.
We believe corporate management teams will delay large capex (ex-AI) and hiring plans until further clarity on trade rules, leading to slower economic growth and shallower EPS gains in 2H25. As such, we remain neutral on aggregate equity exposure and are holding off on adding to risk in the near-term.
Our exposures remain biased towards high quality, secular growth (like AI) which we expect will outperform trade-sensitive cyclicals.
See our weekly CIO Strategy Bulletin for more details