Repricing risks post tariff truce

Recession Risk Assessment

• Recession probability is viewed as low (approx. 1 in 6), though risks have not fully disappeared.
• Risk reduction stems from policy flexibility and a partial unwinding of aggressive trade tariff threats.
• The market has shifted from discounting severe upcoming weakness to tolerating soft data if it reflects past policy impacts.
• The primary downside risk remains a significant acceleration in labor market damage, specifically a rapid rise in unemployment.
• A re-escalation in trade policy (e.g., tariffs exceeding 30% on China) or a new economic shock could revive recession fears.

Macroeconomic Outlook: Inflation and Growth

• Base case economic growth is forecast at approximately 1% for the year.
• Tariff impacts are expected to manifest as a "higher inflation, lower growth" environment.
• A 10% tariff floor is established, removing both the extreme upside (no tariffs) and extreme downside (deeper freeze) scenarios.
• Effective tariff rates are estimated to settle between 12% and 13%.
• The market is transitioning from a focus on trade policy to a broader mix of fiscal policy, labor data, and inflation metrics.

Market Implications and Volatility

• Equity markets are expected to enter a "choppy" range, having already priced in a recovery and a 1% growth baseline.
• The path for equities is narrow, with risks on both sides: downside from economic weakness vs. upside from policy relief.
• Bond markets are identified as a potential constraint on equity rallies if the yield curve behaves negatively.
• Deficit concerns and the upcoming tax bill are percolating as a potential catalyst for bond market volatility.
• Sentiment has adjusted from super-bearish to neutral, but trends like a steeper yield curve and weaker dollar are expected to persist.

Federal Reserve and Monetary Policy (2025-2026)

• The Fed may initiate rate cuts in September or December 2025 if unemployment rises above 4.5%.
• A potential new Fed chair regime is expected to emerge within a year, likely ushering in more dovish policies post-2026.
• The bond market is priced for roughly 25-26 basis points of cuts in 2025-2026, but prospects for easing may exceed current pricing.
• Inflation is expected to peak in late summer following tariff implementation, potentially allowing disinflationary trends to dominate by end-2026.
• The Fed is anticipated to cut rates at the first sign of labor market weakness, even if inflation remains elevated.

Asset Class Outlook: Dollar and Equities

• The U.S. dollar is expected to remain on the "back foot" as investors diversify away from prolonged U.S. dollar exposure.
• The removal of "big tail" risks makes the gradual unwinding of the U.S. dollar overvaluation more likely.
• Fixed income duration risk in the U.S. remains a concern, driving allocation shifts within the bond universe.
• U.S. equities face less structural underperformance risk relative to global markets, though currency weakness acts as a cushion.
• Currency depreciation is viewed as a safety valve for equities but introduces ambiguity for bond markets via back-end pressure.

Forward-Looking Catalysts and Risks

• The nominal U.S. deficit reduction measures previously anticipated appear less likely, potentially increasing term premium volatility.
• Geopolitical focus is shifting from immediate trade deals to Ukraine, Russia, Iran, and fiscal policy specifics.
• The market is braced for a "narrow path" where the bond market becomes the primary break point for equity rallies if deficits spiral.
• A sharp increase in unemployment over one or two payroll reports could rapidly reawaken recession fears.

Cultural Segment: Preferred Movie Endings

• Josh Shiffrin cites the finale of Lost as his preferred change, expressing lingering dissatisfaction with its ambiguous conclusion.
• Dominic Wilson highlights the death of Halloran in the film The Shining as a disappointing deviation from the book, where the character survives.
• Wilson also cites the death of Leo DiCaprio's character in The Departed as a jarring narrative choice that could be improved.