Macro View: Policy-driven uncertainty is making macro conditions worse than they already are. The unemployment rate may exceed the Fed’s year-end 4.4% target as early as this summer. The risk of a nonlinear jump in the labor market is near. On inflation, the Fed’s preferred metric, PCE, was up a subdued 0.1% last month. The likelihood of a “Liberation day” part 2 is low, but we could see aftershocks this summer into the tariff deadlines. Meanwhile, the recent bouts of policy driven whiplash has created a volatile world and low conviction. Net, we believe the macro path ahead will likely get even bumpier than what we have experienced, given narrowing policy options left for the administration.
Fed View: The macro conditions listed above warrant Fed cuts, and the longer the Fed waits to ease, the more they passively tighten conditions. We still view inaction as action and a potential policy mistake. If data weakens but the Fed postpones rate cuts beyond the July FOMC, we see the odds of jumbo cuts (i.e. 50bps) as an almost déjà vu repeat of how they proceeded last year.
US Trade Update: The trade picture in the US remains in a great degree of flux, amid a recent court ruling that blocked most of Trump’s tariff policies, and the subsequent appeal allowing those tariffs to stay in effect for now. Previously, there had been encouraging news on the trade front, with a UK trade deal, as well as a temporary 90-day trade de-escalation with China, with both nations dropping tariff rates substantially. Trump also recently agreed to extend the EU 50% tariff deadline to July 9. Meanwhile, recent tariff setbacks and lawsuit challenges may result in the administration losing leverage with trade partners.
Fiscal Policy: Meanwhile, the Big Beautiful Bill (BBB) passed the House and is now in the Senate’s hands. The bill as it stands would extend TCJA provisions, exempt taxes on tips and overtime, increase the SALT deduction to $40,000, and change Medicaid work requirements. The final BBB will likely see Senate changes, and the process may drag into July (getting dangerously close to the debt ceiling x-date). Meanwhile, the BBB is likely linked to tariffs—Republicans may have been factoring in the prospects of tariff revenue. The inability to use tariffs to raise revenue would make the fiscal situation even more dire ahead.
Special Topic - Credit Downgrade Views: Three strikes and you’re out? The recent Moody’s credit downgrade took away the US government’s last coveted AAA rating, amid concerns of an unsustainable debt load trajectory and rising interest expense. Compounding interest is catching up to the US, with the last 12 months of interest expense now exceeding that of the national defense bill, a sign the US desperately needs lower rates to manage future deficit spending. This month’s special topic explores the macro and market implications of the current fiscal environment.
