Macro View: For a while, fundamentals were taking a back seat to politics but are now likely getting impacted by the uncertainty created in Washington. This is most evident in the sharp reduction in recent US consumer confidence surveys as well as the pullback in retail spending seen at the start of the year.
There is clearly a split between the sentiment displayed by households versus the optimism and confidence seen from CEO surveys. Complicating matters further is the ongoing bifurcated nature of the K-shaped economy, where upper income spenders have largely kept the economy afloat (plus fiscal spending in the prior administration). Treasury Secretary Bessent said it clearly: US private sector has likely been in a version of a recession, we agree.
Markets have been trying to focus on the incoming updates from the Trump administration. However, the record flood of executive orders and policy pronouncements (along with DOGE spending cut headlines) can get emotions up and leave one’s head spinning. We say don’t get caught up in the noise, stay focused on the medium-term and the true intentions of administration, which in our view is to reset macro & market conditions to drive rates down.
Fed View: Unless the stock market experiences a persistent series of declines (and moves closer to a bear market) we do not expect the Fed to come to the rescue and cut rates just yet. The overarching messaging has emphasized patience and that policy is less restrictive than it was at peak rates—thus, the Fed does not need to be in a hurry to adjust rates lower. Given the hawkish-leaning commentary, we continue to expect a prolonged pause before rate cuts resume mid-year, whereas ending the QT process may occur much sooner.
Special Topic – The challenge of advancing Trump’s spending & tax cuts agenda: With only a slim majority, the House has pushed forward one “big beautiful bill” that projects spending cuts while extending tax cuts and raising the debt ceiling. The Senate, on the other hand, is pursuing a two-bill approach, punting dealing with the expiring provisions of the Tax Cuts & Jobs Act until later this year. We expect the process of reconciliation to be challenging and one that will keep markets on edge (and volatile) over the coming weeks/months until it all gets passed. The risk is that the budget process only gets bumpier from here on out.
Markets: March may live up to the saying “in like a lion out like a lamb.” At the time of writing (this is a fluid world after-all), a broader set of tariffs may get implemented, we may get the first weak NFP reading early in the month due to mounting job cuts (both at federal & private based), and budget process remains unresolved (with 3/14 the next major date). Altogether, this has the ability to pressure risk markets further to the downside until the middle of the month.
