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Intro & Macro
Markets are riding a sugar high of stronger economic growth and softer inflation, but that trajectory is about to change. The better-than-expected news on both fronts – growth and inflation – since April has pushed US bond yields lower and equity markets higher. Yet, as the latest tariff shock begins to seep through the system, investors are holding their breath for confirmation of the damage beneath the surface noise. Higher tariffs will feed through to prices, squeezing real incomes that are already under strain.
Chart 1: Global Economic Surprise Indices – Inflation and Growth#
Source: Bloomberg
Much of the risk in the next six months is centred on US asset markets. Reciprocal tariffs on US goods sold abroad have so far been mild, but the impact on the domestic front will be more pronounced. Tariffs are set to push US inflation higher just as the Fed considers rate cuts, leaving policy – and policymakers – in a bind. Outside the US, the situation is more resilient: economic growth surprises have held up, while US data has come in below expectations.
US Inflation Outlook
This week’s US inflation report is unlikely to show much tariff effect in the July data—tariffs averaging 15–20% only took effect on 7 August, and their impact will be more apparent over the next two to four months as pre-tariff inventories run down. For now, the US CPI report, due out on 12 August, is expected to show a 0.3% month-on-month increase in core CPI, taking the annual rate to 3.0%, and a 0.2% advance in headline CPI, for an annualised 2.8% year-on-year surge. Upside risks have increased following a stronger ISM services print.
The policy mix—tariffs combined with tighter immigration—points towards stagflation risks: higher inflation alongside slower growth. The Fed remains in the “transitory” camp, leaning more towards cuts, but persistent inflation could force a sharp market repricing of rate cut expectations. Goods inflation is now on the rise, with potential acceleration in appliances, apparel, and autos. A sustained 0.4% monthly core CPI would push the annual rate towards 3.7% by year-end—a clear sign of a persistent shock. A weaker dollar only adds to the pressure. If inflation proves sticky, the Fed may be forced to delay or even abandon the expected cuts altogether; in extremis, hikes cannot be ruled out either. Exacerbating this, rising inflation risks could push long yields above 5%, while stagflation would leave already-expensive equities looking vulnerable.
Chart 2: US Consumer Price Inflation Turning Higher
Source: Bloomberg
Changes at the Fed
Personnel changes at the Fed will also shape the direction of the monetary policy. President Trump’s nomination of Stephen Miran to the FOMC initially looked like the choice of a seasoned economist for the post. Yet, as the Wall Street Journal noted, Miran’s past criticism of rate cuts—couched in warnings about “permanently higher inflation”—sits awkwardly with Trump’s current push for easier policy. Markets may have to navigate a Fed where internal voices diverge more sharply.
Emerging Markets to Make Hay?
Beyond the US, lower local inflation, a weaker dollar, and the prospect of lower US rates are typically good news for emerging markets. Indian assets have struggled in recent months, hit by tariffs, currency weakness, and underperformance of equities. Yet, the macro backdrop is sound—low debt, below-target inflation, and yearly growth on track at 6.5%. With inflation easing, the RBI, the country’s central bank, could cut rates later this year, lifting earnings and reigniting foreign inflows. Tentative signs of a turn are already visible, with foreign investors turning net buyers in the equity futures market last week.
Chart 3: Indian Equities (Nifty 50) Relative to MSCI World Total Return ($)
Source: Bloomberg
Fixed Income in Demand
Investor interest has intensified in fixed income—partly as a de-risking mechanism for private portfolios, and partly as a search for income to offset inflation. But the hunt comes at a time when spreads are tight and credit markets are running hot. US credit conditions have moved from supportive to stretched. Investment-grade spreads are the tightest since the 1990s; global high-yield spreads are 40bps tighter than a year ago, with yields nearly 70bps lower. Leveraged loan prices are up, and issuance has surpassed $1 trillion earlier than last year, reigniting the memories of the 2020 debt binge.
Private credit has joined the party, exemplified by the record $29 billion financing for Meta’s Louisiana AI data centre—an unprecedented scale for the sector. This highlights how the AI capital race is converging with the most aggressive high-risk lending boom in decades. Money market fund assets are at a record $7.15 trillion, up 16.6% year-on-year, underscoring the strong liquidity backdrop. Two-year yields at 3.76% remain well below earlier peaks, markets are pricing in 58bps of cuts by year-end, and breakeven inflation is trending higher. The credit backdrop is vibrant—to the point of concern.
Our preferred approach is to go beyond the US shores when seeking income-generating assets; for example, European high yield still offers value. UBS reports that current valuations in high-yield credit—with spreads around 350–400bps and yields between 5.75% and 6.25%—are consistent with long-term averages. Also, semi-liquid private credit funds still offer projected yields of 6.5% to 9%.
Global central banks remain broadly supportive of their economies. Last week, the UK MPC cut policy rates by 25bps in a closely contested vote. This week, the Bank of Thailand is expected to lower rates to just 1.5%, while the Reserve Bank of Australia is likely to follow with a 25bps cut to 3.6%.
Beyond the US CPI release, this week’s data calendar includes producer price inflation and advanced retail sales figures.
Support for Japanese Growth and Equity Market
A quick nod to Japanese equities, which staged a solid rebound last week: In Japan, wage growth has been a lingering concern, but the government’s announcement of a record 6% increase in the minimum wage, effective October, should underpin stronger private sector pay settlements. Meanwhile, the Bank of Japan’s real consumption index rose 0.3% in Q2, following a 2.9% surge in Q1, suggesting consumer spending trends remain robust. This bodes well for GDP growth, and we retain a constructive view on Japanese equities.
Chart 4: Japanese equities relative to MSCI World ($ TR)
Source: Bloomberg
Gary Dugan – Investment Committee Member
Bill O’Neill – Non-Executive Director & Investor Committee Chairman
11th August 2025
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