11 Jul 2025
The world continues to grapple with US President Donald Trump’s chaotic tariff policy since his “liberation day” announcement on April 2. The unveiling of sky-high tariffs rattled allies and rivals alike. While effective tariff rates have dropped since then, it appears that market-friendly voices within the Trump camp are prevailing over those who are solely driven by ideology.
Although the administration now seems to be adopting a more pragmatic stance, a high degree of uncertainty still persists. A court battle is currently underway to address lingering questions regarding the use of emergency provisions to impose tariffs. We anticipate gradual, although possibly bumpy, de-escalation going forward.
| Region | Real GDP | Inflation | Central Bank |
|---|---|---|---|
| US |
↓Less efficiency |
↑Higher goods prices |
More uncertainty over movements in the short-term and more"reactive" bias |
| Rest of the World |
↓Loss of a key export market |
↓Lower energy prices |
Expect loosening bias |
We believe the Trump administration has realised that transforming the US economy into the world’s workshop is not feasible. However, this doesn’t mean that US security concerns over certain key production lines have abated. It’s highly likely that the US will continue to pursue self-sufficiency or, at least de-risk supply chains in key goods such as semiconductors and pharmaceuticals. It’s unlikely that the US will aim to gain a dominant share of the market for t-shirts, toys, dolls or other such low value items.
This trade war has highlighted how embedded Chinese products and components are in Western industry and it could be argued that the US is also at a loss in terms of how to respond.
There is no denying that some of the national security concerns that the US has often cited as a base to impose tariffs on their partners are real. The rise of China from an exporter of low value-added consumer products to industrial powerhouse with strong competitiveness in key sectors like semiconductors, automotive or heavy industrial machinery can’t be ignored. This poses a risk for Western nations and a great challenge for countries with large exports in such industries, especially in Europe.
US growth may face a bumpy path ahead in the coming quarters because of policy uncertainty and trade volatility, but Trump taking the off-ramp with regards to the de facto trade embargo with China means that something approaching a sharp slowdown or perhaps even a recession is now highly unlikely. We expect the impact from tariffs on US inflation this year to be a little lower than feared earlier and equally growth expectations should be a little higher.
That said there are still some pre-existing areas of weakness in the US economy that are worth monitoring in the medium term. We would define the current environment in the US as a “bifurcated equilibrium”. This can be seen amongst consumers (top 10% account for as much as 50% of consumption) and the stock market (large caps outperform small caps). We see several scenarios where the US Federal Reserve might feel compelled to cut more than currently priced, yet residual inflation uncertainty will likely make the Federal Open Markets Committee (FOMC) more reactive than proactive.
We expect a shift in focus from the more painful items of Trump’s agenda, such as trade, to the more positive ones for risk, such as fiscal policy, deregulation and the potential resolution of simmering geopolitical conflicts.
When it comes to US fiscal policy, we have reassessed our stance. Recent proposals show spending increases will exceed reductions. The overall trajectory now appears expansionary, making the long end Treasuries less attractive amid mounting scrutiny of US government finances.
The temporary truce on the tariff front augurs well for the US but we expect the EU and the UK to be at the receiving end if cheap Chinese goods flood into their markets. This could particularly exacerbate the problems faced by Europe’s manufacturing sector, which is struggling to compete with the US and Asian countries. We expect growth to disappoint both in the EU and the UK. The ongoing global trade war, along with lower oil prices and their currency’s strength against the dollar, may contribute to disinflation. That could drive the European Central Bank and the Bank of England to further cut interest rates.
We see this environment as positive for both rates and spreads. Government bonds might benefit from sharper cuts in rates than what’s currently priced. For now, duration in developed markets outside the US is preferable, along with the front end and belly of the US curve. Certain emerging markets, such as Brazil or Mexico, also offer interesting opportunities in the rates space.
Risk assets are today in a stable equilibrium, given several different forces at play. Yet, credit spreads are tight, and the overall macroeconomic picture is not great. We continue to prefer defensive sectors, secured bonds and short duration paper, with several high conviction themes.