Tariffs
We remain bullish both bonds and equities, but conviction is falling. We are Luddites when it comes to the AI theme, but we have followed it regardless. A bubble is a bubble, not to be shorted. Yet Europe’s weak AI returns reveal 2025’s real story: the fall of King Dollar.
High US inflation is being driven by tariffs, not domestic inflationary pressure. This argues for Fed easing and a bull-steepening of the Treasury curve.
Investors will be disappointed if they buy into the China rally and then Russia escalates the war in Ukraine.
Inflation expectations in the US remain reasonably well anchored and there are few signs of a brewing wage-price spiral. Thus, the near-term risks to growth outweigh the risks of higher inflation. Looking beyond the next year or two, however, we are worried about stagflation.
The cost of tariffs is falling on the US consumer, not foreign exporters or US firms.
This morning’s CPI report marginally tips the scales in favor of a September rate cut.