Navigating the 90-day pause

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 still ahead of us, markets remain positioned for optimism, bolstered by news of deals in the UK and China. But with Europe and Japan yet to make significant progress, a degree of limbo remains, with companies 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.

The real question is whether financial markets, buoyed by optimism over tariffs, can look through the data and focus on the potentially better economic expectations that are now being priced into the second half of the year. Clearly, we are in a worse place than we were at the beginning of the year, with seemingly 10% as the minimum tariff rate, but that is a lot better than the situation was only a few weeks ago. Questions remain, but if this is now the ‘new normal’, then we would expect deals to be done with other major trading partners in the coming months.

Against this backdrop, our positioning remains cautious, albeit less so that a week ago given the improving mood music between the US and China. Markets are rallying on narrative, not fundamentals, and we have been reducing risk into these rallies but now feel that potentially the worst is behind us. We still prefer to rotate into high-quality credit and cyclicals 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.