Macro View: Uncertainty surrounding fiscal and trade policy remains front and center. The latest survey data on consumer confidence and sentiment show a sharp rise in inflation expectations and a pronounced drop in the economic outlook ahead. This pessimism is partially captured in hard economic data as well, with the personal savings rate growing for two consecutive months as consumers start to take their foot off the gas, and time will tell how much the rattling of equity markets will weigh on wealth-effect spending. All of this angst has us increasing the odd of stagflation and/or recession in the near future.
Fed View: The major announcement was regarding QT, where starting in April, the Fed will slow the pace of decline of its securities holdings. The Fed views this as a slowdown to elongate QT versus calling for a pause. Updated SEP forecasts inject a neutral to slightly dovish tone and the once antiquated “transitory” label has re-emerged to describe how prices may react to tariffs in 2025. We maintain our view that the Fed will deliver at least 2 cuts in 2025.
US Politics: Fundamentals and the Fed continue to take a back seat. Markets remain focused on the ongoing policy updates coming out of the Trump administration. Congress managed to avert a government shutdown after the Senate passed the stopgap funding bill, kicking the can down the road as the House and Senate work toward an agreement on the budget resolution. We are keenly monitoring tax season given the x-date issue for the debt ceiling.
Special Topic – Trump’s multi-battle with twin deficits: One of the main pillar’s to Trump 2.0 policy objectives is to tackle the trade deficit (and indirectly the budget deficits via tariffs). There will likely be more to unpack in the days and weeks after “liberation day.” However, the general idea is to target reciprocity to raise tariffs on major trading partners, especially those running large trade surpluses with the US and those that levy relatively higher tariffs on US exports. There are also tariffs aimed at re-shoring manufacturing (like autos) and bolstering supply chains for national security. This rebalancing act will likely have implications for capital flows which have supported US markets.
Markets: 1Q25 was volatile but in our opinion was a much-needed leveling period that has brought market valuations into a better balance, true for equities but also USFI. As rates dropped, IG could not keep up given that credit spreads started off the year near recent tights. Meanwhile the cheapening of HY is justified, it’s a reminder they encapsulate risk. That said, unless the US economy weakens more, rates and spreads are back home on our ‘25 range.
