Tariff tumult: reassessing the US economic outlook

Market & Trading Calls

• Downward Growth Revisions: We revise lower 2025 US GDP growth to 0.8% and raise the probability of recession to 50% reflecting increased short-term economic risks following aggressive tariff policy. Inflation is likely to remain elevated in a range between 3.2 – 3.5%. The equity market selloff reflects concerns around US growth prospects.
• Bond Market Volatility: The bond market is being whipsawed between growth concerns and inflation risks. After the initial tariff announcement last Wednesday (April 2nd), 10y yields fell 13bp, a clear reflection of weakening US growth prospects. However, 10y yields have since surged higher 40bp this week while short-term yields have lagged behind, steeping the 2s – 10s curve to its highest since early 2022. This reflects both investor expectations for rate cuts (short end), but also concerns about inflation, fiscal sustainability, and possible foreign selling (long end).
• Fed Unlikely to Aggressively Cut: The market has eased back a bit from Fed cut rate expectations as concerns about inflation remain front of mind and Trump delayed reciprocal tariff implementation for 90 days (excluding China). We expect the Fed will chart a cautious path ahead.‍
• Re-Shoring Uncertainty: The Trump administration appears to be betting that short-term pain from tariffs will result in medium- and long-term gains through investment re-shoring and trade rebalancing. While a worthwhile endeavor, we are not convinced of this outcome, at least for now. If the aim of the White House is to truly reduce the trade deficit, additional policy implementation will be required, including an easing in immigration restrictions, taxing non FDI inflows, focusing on a clear industrial policy, and limiting tariff implementation to large net surplus economies.