The 90-day pause: a countdown without clarity

In recent weeks, we’ve observed a subtle but important shift: Trump appears far less reactive to equity market volatility than he was during his first term, when he routinely measured his success by the performance of the S&P 500 Index. This time, the critical gauge is US funding costs. He wants lower Treasury yields, lower interest rates and a weaker dollar. When Treasury yields began to crack in April, the tone shifted. The bond market, not the stock market, now seems to be driving policy calibration.

With the bigger chunk of the pause ahead of us, markets remain positioned for optimism – assuming deals will get done – and continue to trade on headlines rather than substance. But as time passes without material progress, that optimism may give way to anxiety.

While last-minute deal-making is not impossible, we think it’s naïve to expect clean, comprehensive resolutions with Europe, Japan and China within the remaining window. The further we get without firm agreements, the more volatility we expect to return. If we reach the end of this pause without tangible progress, we anticipate another risk-off episode. Perhaps not as dramatic as the immediate post-Liberation Day sell-off, but still significant.

As markets wait in limbo, tariff impacts are starting to manifest on the ground. Companies are front-loading imports and delaying strategic decisions, which is likely to depress data in the coming weeks. Spending hesitations, forecast withdrawals, and supply chain adjustments are already contributing to a weakening macro backdrop in the US.

This economic hesitation is creating an odd contradiction. The curve is pricing four US interest rate cuts this year and an additional one in 2026 – a signal of deteriorating growth expectations. Yet markets continue to rally. The dislocation cannot persist indefinitely. The Federal Reserve (Fed) will not cut unless it sees both a material decline in economic growth and employment – and so far, employment has only marginally softened. Until there is meaningful deterioration in the labour market, the Fed can afford to wait. Employment, in our view, is the single most important variable. Policy, positioning, and market sentiment will all pivot off this axis.

Outside of the US, tariff impacts are being felt – but unevenly. German stimulus, for instance, remains more of a 2026 story than a 2025 one, meaning Bunds have retraced much of their post-announcement sell-off and are once again serving as a safe-haven anchor.

Interestingly, European growth may be starting to turn the corner, albeit tentatively. With inflation under control and tariff-related deflationary pressures increasing, Europe may lead on rate cuts again — but this time from a position of improving fundamentals. In contrast, the US is slowing, inflation remains ambiguous, and employment is only just beginning to respond.

Notably, the US economy seems to be bearing the brunt of tariff-related uncertainty more than its global peers — a factor not yet fully appreciated by markets.

Against this backdrop, our positioning remains cautious. Markets are rallying on narrative, not fundamentals, and we have been reducing risk into these rallies. We prefer to rotate into high-quality credit, where spreads have widened to levels we consider ‘recessionary’. We are slowly building exposures at attractive entry points.

Reflecting our view that US growth is going to be weaker for the next few months and that will be reflected in risk appetite and the underlying duration effect we’ve also been increasing US duration.

On inflation, we expect some pass-through effects over time, but collapsing oil prices remain a strong counterweight, particularly for US consumer sentiment. The inflation outlook, whilst elevated from a soft data perspective, seems to be fairly well anchored when looking at the five year/five year expectations.

The market’s current optimism is built on thin ice. Trump continues to talk a good game but has yet to deliver and time is running short. For fixed income investors, the key takeaway is this: uncertainty – not growth or inflation – is the dominant force right now. And in such an environment, we continue to prioritise quality, flexibility and liquidity.

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