Macro Musings: A rebound in government spending will likely boost Q1 2026 real GDP after an artificially suppressed Q4 2025 (from the government shutdown). However, outside of Ai-adjacent activity, underlying aggregate demand and/or fixed investments is showing little sign of broadening out. Meanwhile the ongoing uncertainty around tariffs and geopolitics versus a backdrop of stretched market valuations, suggests to us growth likely decelerates into the second half of 2026. After a year of virtually no job growth, recent data does not hint at a turnaround is near. Furthermore, we are seeing evidence that the Ai revolution is starting to have an impact on labor market dynamics. It will be a bumpy process, but inflation should continue to slide ahead.
Market Thoughts: By and large, the forecasting community has high conviction that it’s going to be a banner year in the US. Well, we are two months into 2026, and in our view, the jury is still out on what lies ahead. Meanwhile markets are plagued by the nagging inconsistency of competing pros/cons and instead is focused on factors (like private credit, valuations, Ai disruption & geopolitics) leading to a decline in rates (towards our forecast path of sub 4% for all USTs excl. 30s). When analyzing diverging trends across many asset classes, we view the “great rotation” thesis as a potential head fake and masking the reality that investors are perhaps looking for safety and alternatives. Given the uncertainty, we continue to advocate buying USTs on dips.
Fed and Rates View: We believe the Fed cannot pause for 9 months (like in 2024/2025) and still maintain a forecast of 3 additional 25bp cuts for 2026 and expects policy to become slightly accommodative (in real terms). There has been no material forecast change post January - see pg 35.
US Policy Updates: Trump administration went to “Plan B” once the Supreme Court (SC) struck down IEEPA, using section 122 to apply a 15% rate. As stated by SC comments, refunding the tariffs already paid will likely be a “mess” and for that reason perhaps many will view it as a sunk cost.
Special Topic – Diversification, not de-dollarization: We explore the changing nature of US flows and are still of the view that global investors are seeking to diversify more so than outright de-dollarize. For some time, net financial inflows into US have been beyond what was needed to fund trade deficit (overseas chased US big returns, that is likely turning). Diversification into other countries will likely impact US equities disproportionally given that US stocks as % of the world is much larger versus that of bonds. That said the USD remains the bedrock of the global financial system, with no viable alternative that can compete with the dollar’s deep capital markets.
Please see the PDF report link above for the full write-up with charts and forecasts…