Top of Mind - Week of May 12, 2025
- Last week brought the first trade deal in the post “Liberation Day” environment as a new agreement was inked between the United States and the United Kingdom.
- News of the first trade deal was positively received. Still, heading into the weekend, all eyes were focused on the potential outcomes of the US/China trade negotiations taking place in Switzerland.
- Before talks began, the US had a tariff rate of 145% on Chinese goods while China’s rate on US goods was at 125%, essentially freezing trade between the world’s two largest economies.
- The results of the deliberation exceeded market expectations. A 90-day pause was instituted by both countries during which tariffs would be significantly reduced. The US lowered the tariff rate from 145% to 30%, and China lowered its rate from 125% to 10%.
- With a trade deal established with the UK and ongoing negotiations with China seemingly moving in a positive direction, the Eurozone is likely next on the list for trade deal negotiations.
Top of Mind - Week of May 5, 2025
- No interest rate cut is anticipated at this week’s Federal Reserve (Fed) meeting, leaving the policy rate at a target range of 4.25% to 4.50%.
- We anticipate that the Fed will reiterate its wait-and-see approach, pointing to the unknown impact of tariffs on prices and how companies respond.
- Economic data continues to be muddled. Survey data suggests the labor market should be rapidly deteriorating, while the actual data isn’t showing signs of stress, yet.
- Interest rate markets are anticipating that the Fed will cut three times by the end of this year, suggesting the Fed is behind the curve in projecting only two interest rate cuts. However, in a quickly changing environment, interest rate markets and the Fed will be adjusting as trade and labor market dynamics continue to come to the surface.
- With the current backdrop of inflation above the Fed’s 2% price stability target (by nearly any measure you can find), the unknown price impact from tariffs, and a labor market that isn’t showing imminent signs of weakness, the Fed can afford to be patient at this time.
Top of Mind - Week of April 28, 2025
It appears that peak tariff uncertainty is behind us as we’ve moved from the 90-day pause on reciprocal tariffs to the point where more goods are being considered for exemption or have been outright exempted from tariffs by both the US and our trading partners.
- While tariff uncertainty has likely peaked, we anticipate that uncertainty will remain elevated moving forward, as trade deals are complex arrangements and take time to finalize.
So, what could provide a positive catalyst in this environment of elevated uncertainty?
- With mid-term elections next year, we don’t anticipate the Administration having much of an appetite for a policy-induced recession or prolonged weakness in equity and fixed income markets.
- Additional reprieve of announced tariffs or further exemptions would provide the most immediate relief, and beyond trade policy, the potential for lower taxes and decreased regulation stands as positive catalysts.
- However, should these potential positives fail to materialize, risks are skewed to the downside.
Top of Mind - Week of April 21, 2025
- At the start of 2025, US equities weren’t alone in appearing fully valued: investment grade and high yield corporate credit traded at or near historically tight spread levels, while the securitized sector offered relatively attractive spreads.
- Elevated uncertainty surrounding trade policy has since driven corporate credit spreads wider, improving valuations compared to much of the last year, with securitized spreads also widening.
- Persistent uncertainty and the absence of new trade deals continue to fuel speculation about the direction of the economy and could continue to weigh on credit spreads.
- Despite the possibility of further spread widening, the balance sheet strength of investment-grade corporate credit issuers remains strong, and the credit enhancement of the securitized sector positions both as compelling opportunities.
Top of Mind - Week of April 14, 2025
- Turbulence shifted from stocks to bonds last week. The S&P 500 spent much of the week rallying on the back of the announced 90-day pause in reciprocal tariffs, excluding China, sending the index up +5.7% for the week.
- However, after an intraday plunge below 3.9%, the 10-year US Treasury rate exploded higher, nearing 4.6% late in the week. Concerningly, the US dollar weakened as rates rose, falling -3%. This combination is seldom seen in developed markets, let alone the US bond market.
- It’s fair to speculate that the rapid increase in yields played an important role in the 90-day pause. The Administration has been abundantly clear that it wants lower interest rates. Credit spreads also widened, doubling the stress on corporate borrowing costs.
- Over the weekend, short-term tariff exemptions were granted on several electronic goods and semiconductors, in another positive step toward de-escalation.
- We expect volatility to remain high, but are gaining confidence that we have reached peak uncertainty. It’s likely that any further protest by the US bond market will be met with more accommodation by the Administration.
Top of Mind - Week of April 7, 2025
- Global equity markets were thrust into a policy-induced selloff after last Wednesday’s “reciprocal” tariffs announcement.
- Policy uncertainty had been steadily rising since the middle of the first quarter and was turbocharged by the tariff announcement.
- Volatility, as measured by the VIX, rose in concert with elevated policy uncertainty and hovered structurally higher throughout much of the first quarter, and also leapt much higher post-announcement.
- While the risk of a recession has materially increased over the past week, markets will continue to seek clarity on policy from the Administration (delay and/or easing of tariffs), Congress (tax cuts), and the Federal Reserve (interest rate cuts).
- This is an incredibly fluid situation with the potential to change rapidly. We remain disciplined and steadfast in our approach, closely monitoring ongoing developments and adjusting portfolios accordingly.