US growth concerns rise amid chaotic Trump policy

Market & Trading Calls

• Shifting Market Expectations: While the US economy has shown resilience over the past two years, growing well above trend, markets are increasingly pricing in concerns of a slowdown in growth. 10y bond yields have declined to the lowest levels since early-December, USD has weakened off highs from mid-January, and equity markets are broadly off the highs from earlier this year.
• Policy Uncertainty and Growth Risks: Trump is pursuing a three-pronged economic approach – cut inflation, improve terms of trade, and spread the burden of defense spending among allies. Unfortunately, chaotic, and sometimes inconsistent policy revolving around these three goals is creating uncertainty among businesses and consumers.
• Downside Economic Risks: For now, we will take a middle ground approach around US growth projections. We will revise lower our US growth expectation to 2%, down from 2.5%, albeit we will continue to assume core CPI-based inflation remains stuck in a range between 3 – 3.5%. This inflation assumption is predicated on the fact that immigration restrictions, and tariffs could keep inflation sticky despite lower growth, at least this year.
• Recession Unlikely: Despite policy uncertainty, it is our view that the US economy will avoid a full-blown recession (GDP growth <0%). While chaotic Trump economic policy is disruptive, it is not yet enough to push the US into outright contraction. We see a US recession as less than a 1-in-5 probability at present.