Macro View: The 1st quarter of 2025 posted negative GDP growth, highlighting an economy that is clearly having a hard time retooling. We believe there is potential for a more protracted downturn. On the labor front, the federal hiring freeze and accompanying layoffs, as well as less immigration ahead due to stricter border control, will likely lead to higher unemployment and slower jobs growth. On inflation, recent reports saw broad-based softer inflation across several categories. However, fears remain that tariffs will eventually cause a resurgence in inflation. Unless there is stimulus and/or more bank lending, we believe that substitution effect and demand destruction will limit how much inflation the US experiences from the tariff adjustments ahead.
Fed View: The current political and economic environment makes pre-emptive rate cuts (ahead of rising layoffs and job losses in the private sector) much less appealing, but there are enough headwinds to growth that will likely make the Fed act sooner rather than later. Our base case remains a June cut with 3-4 total cuts this year, though the magnitude of easing depends on whether we remain in a stagflation-lite scenario versus entering into a mild recession.
US Politics: Trade policy updates continue to dominate headlines. Trump’s Liberation Day tariffs were harsher than markets anticipated. Tariffs had both a universal and targeted component, with a blanket 10% levied on all countries, and a more targeted approach utilized a ratio factoring in the US and country specific trade deficit as well as the total exports that nation sends to the US. However, as of April 9, Trump announced a 90 day pause on reciprocal tariffs, with the 10% blanket tariff still in effect (excluding China, where the tariff rate on China has reached ~145%). Most recently, Trump announced reprieves on autos and electronics, and floated the idea of easing on China.
Special Topic - De-dollarization? More like Realignment! In our view, the calls for the end of dollar dominance are overstated. Instead, we believe international investors (in particular Europe) added to US asset exposure given the belief that Trump 2.0 would be a business-friendly world (many used the Trump 1.0 playbook). Given tariffs have been more disruptive to markets than initially anticipated, investors found themselves overexposed to US assets (and not hedged for FX), and are now in a period of de-risking, rather than permanently moving away from the US.
Markets: We expect rates to remain volatile and for the yield curve to continue to have divergent behavior (long-term USTs will continue to discount DC policy changes). Meanwhile, with the macro backdrop likely to continue to weaken amidst a world of higher vol & uncertainty, we believe that the old “sell in May and go away” is sound advice. The bear market in risk assets has only started.
