Macro View: The economy is showing its strongest signs of breaking at a time when the roadblocks to growth are being lifted and when the administration is racking up some of its biggest wins. Geopolitical tensions that posed a risk to oil and goods prices have receded for now, trade deals are being announced and the landmark O-BBB is progressing through Congress. Yet the paradoxical economy, that once grew in the face of many challenges, may now be at its breaking point. Consumer spending trends are falling fast to the lowest level in a decade and weak hiring is manifesting in the timely continuing claims data. The current macro environment can be characterized as softening at best and outright collapsing at worst. Our baseline view falls somewhere in the middle. Overall, we think the ghosts of transitory past continue to haunt the Fed and that will hold back the economy at a time where some headwinds are lifting.
Fed View: We maintain our view that the longer the Fed waits, the more they are passively tightening when economic conditions are already softening. We think 4 cuts this year would bring the Fed Funds rate closer to neutral, and it would decrease the need to cut in early 2026. The irony is, the Fed is waiting on potential inflation growth that may never come, or at the very least, may only return at the end of 2026 due to Trump’s domestic policies, and/or more importantly, if US bank lending surges and drives up money supply. For now, much of our view hinges on the near-term path for the labor market continuing to weaken. If the upcoming jobs data confirms our suspicion that the underlying labor market is weaker than current estimates, they’ll cut in July (which remains our house view). Otherwise, we expect the next Fed cut to be in September.
US Trade and Fiscal Policy Update: As we come up on the expiration of the 90 day pause on reciprocal tariffs, the administration has indicated another extension is possible. Treasury Secretary Bessent said that the US has already formed a deal with the UK and reached an agreement with China, while further deals with major trading partners are in the works, noting Trump’s trade agenda could be wrapped up by Labor Day. Meanwhile the O-BBB continues to be in a state of flux in the Senate. The goal is to finalize the bill before July 4, though Congress must still agree to changes regarding Medicaid, hospital funding, and the SALT deduction. Notably, Bessent asked the Senate and the House to remove Section 899, the “revenge tax” provision, from the bill.
Special Topic - Flows come & go (but USD remains in the driver seat of global banking system): We update recent foreign flows into US assets and explore the role/history of the USD as a global reserve currency. We conclude that the recent lackluster total returns are possibly why foreign investors are so skittish and shifting to alt assets – it’s not necessarily due to diversification, but moreso performance.
Please see the PDF report link above for the full write-up with charts and forecasts…
