Monthly Economic and Investment Outlook

• With the S&P 500 down about 12% following ‘Liberation Day,’ Trump suspended ‘reciprocal tariffs’ above 10% for 90 days, except for China.
• China retaliated with its own tariffs and the ensuing escalation leaves US. tariffs on China up 145% since the start of Trump’s second term. It is not a forgone conclusion that China will come to the negotiating table. We expect China to come after the U.S. services surplus.
• It is unclear wither the Trump administration sees the tariffs as a way to raise revenue to reduce the deficit, to fund the upcoming fiscal package or to reshore manufacturing.
• It is unclear how long the tariffs will be in place and whether they will gradually be whittled down through negotiations. There is the potential for the tariffs to be challenged in court (Supreme Court) as well as for Congress to reclaim authority when to comes to levying tariffs.

 
Sources: Oxford Economics/Haver Analytics
 

• US inflation cooled to a 2.4% y/y in large part due to lower energy prices marking a six-month low. Core inflation also eased to 2.8% y/y. This is all backward looking.  
• The inflation retreat in March against another month of solid wage gains provided households with purchasing power to keep their wallets open for a while.
  

  
  
  Sources: Oxford Economics/Haver Analytics
   
  

• However, tariffs will likely boost inflation more than assumed, weighing on real disposable income and cutting into spending. Equity price declines could exacerbate this via the wealth effect.
• Uncertainty will continue which weighs on business investment in equipment, nonresidential structures and private hiring.
• Extending the Tax Cuts and Job Act removes a future headwind but does not add a tailwind as it just extends the current baseline of fiscal policy.

• Tariffs have pushed down estimates of GDP growth across the world. The negative impact on growth is expected to be highest in the US and then China.
• On a relative basis, we expect better GDP growth and less inflation for the rest of the world.
• Tariffs, while inflationary to the US are disinflationary for the rest of the world. This means that foreign central banks are able to be more aggressive in cutting interest rates to support growth.
  
  

  
  Sources: Oxford Economics/Haver Analytics
        

• Economies that have traditionally run larger current account surpluses may also find themselves having to adapt their economic growth model to the new global trade environment.
• This will make it harder for emerging market economies to attain middle income status.
• On the margin, international fixed income begins to look more attractive and foreign equity markets with their large valuation discounts begin to offer a greater margin of safety.
• One risk to be monitored is whether there will be an outflow of foreign holdings of US assets after an unprecedented period of US exceptionalism. Most portfolios are still underweight international equities.
  
  

       
  Sources: Bureau of Economic Affairs/JPMorgan Asset Management

• The Trump administration’s pause on “reciprocal” tariffs gives three months to strike enormously complex trade deals with dozens of countries that it says are lining up to negotiate.
• China has many tools including fiscal stimulus and devaluation of its currency to combat tariffs. Beijing is aware of Trump’s sensitivity to stock and bond market slides and his exemption on consumer electronics.

• Despite equity market moves, it was the bond market that seemed to prompt Trump to change course, as U.S. 10 year-yields reached 4.5%. This was likely fueled by foreigners selling Treasuries and the unwinding of arbitrage strategies at macro hedge funds.
  
  

   
  
  Sources: Wall Street Journal/Goldman Sachs Asset Management
         

  • Fearing recession, the futures market is pricing in five rate cuts with the first expected in June.
  • The key question for the Fed is whether the large and visible price surge from tariffs triggers a broader wave of price and wage rises as firms and households seek to insulate themselves from the price shock.
  • We anticipate there to be some weakening in the labor market but it is coming from a strong base. We expect the Fed to prioritize the inflation side of its mandate until it sees meaningful deterioration in the labor market.
  • Bonds do not appear to be trading on inflation fears with long terms yields anchored at 2.0%
  
  

   
  
  Sources: Yardeni Research/LSEG Datastream/Federal Reserve
         

• Neutral duration to the fixed income strategy’s respective benchmark as the Fed remains on an easing path. At the same time, U.S. fiscal deficits and debt concern us. At the margin international debt is becoming relatively more attractive and central banks may look to diversify their holdings in the future.
• Slight overweight to short-term investment grade corporates versus the respective benchmark to capture additional income with minimal incremental risk.
• Allocation to short-term Treasury Inflation Protected Securities (TIPS) due to risk of sticky inflation exacerbated by inflationary policies.

• Overweight to U.S. Large Cap stocks with an emphasis on equities with quality, strong cash flow characteristics and lower volatility. A focus on companies that are more insulated from tariff shocks and have strong pricing power.
• Neutral International Developed stocks with no exposure to Emerging Markets. We remain concerned about reciprocal tariff policy as it impacts Emerging Markets.
• Exposure to gold to serve as a hedge, in a geopolitically tense global environment, and supported by strong central bank buying.