Macro & Strategy - June 2025

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Pour some sugar on me

Headlines took a turn for the better in May, at least from a market perspective, as the thick cloud of uncertainty stirred up by “Liberation Day” on April 2 began to settle. In a typical Trumpian twist, the sequence of events that followed was almost theatrical in its execution: a surge in volatility, a hastily delivered social media post declaring it was a “great time to buy,” and the unexpected announcement of a 90-day pause on some of the most severe tariff measures proposed in more than a century.

Markets rebounded notably from that April 9 tweet, not because conditions had improved in any fundamental way but because expectations had been reset so low that “less bad” was sufficient to trigger a rally. Investors, ever forward-looking and highly sensitive to the second derivative of news flow, interpreted the halt in escalation as a deescalation in itself. The bear case priced in by the market in April was being slowly unwound—one headline at a time.

As the Trump administration announced the outlines of new trade agreements—with the United Kingdom and shortly thereafter with China—the tone shifted toward cautious optimism. Predictably, the narrative echoed the Trump 1.0 playbook: Break the existing order, provoke chaos, assign blame externally, and then claim victory as some semblance of stability is restored. In that sense, the trajectory of recent weeks has followed a familiar script. But the question remains: Have the pieces truly been put back into place, or are investors simply relieved that we’ve avoided the worst-case scenario—for now?

Meanwhile, it never gets boring with Trump at the helm, so this month brought into sharp focus the Gordian knot entangling Trump and congressional Republicans. His platform rests precariously on three legs: aggressive trade renegotiation, expansive tax cuts, and promises of fiscal discipline. But those three pillars are increasingly at odds with one another.

Highlights

• Markets calmed in May, but structural risks—like inflation, debt, and fiscal uncertainty—remain.
• Our base case sees an economic stagnation with the Fed on hold through 2026.
• We're underweight U.S. equities in favor of global markets and remain cautious on fixed income.

Without meaningful tax incentives or deregulation, businesses have little reason to invest or reshuffle supply chains in response to tariffs. Without tax relief, consumers may find themselves caught between rising prices and tighter credit conditions. And if spending is not curtailed elsewhere, the fiscal picture could deteriorate fast enough to offset any perceived gains from tariffs or reshoring.

Finally, as if the month hadn't been busy enough, a panel of judges on the U.S. Court of International Trade temporarily blocked the sweeping tariffs imposed on virtually all U.S. trading partners on "Liberation Day" last month, setting up a potential legal battle. The administration quickly signaled it has multiple avenues to pursue the tariffs, potentially creating an even more chaotic situation.

In short, May delivered market-friendly news but did so by rolling back part of the chaos introduced in April. The trade pill, now coated in sugar, still needs to be swallowed, and the longer-term effects on growth, inflation, and confidence are only beginning to emerge.

Trade war: what May taught us about Trump 2.0

Even though the temperature of the trade war cooled notably in May, it would be a mistake to interpret the recent developments as a return to preApril normality. Instead, we appear to be entering a new regime—one that still reflects elevated trade tensions, albeit with a different tone and strategic focus.

The first headline of consequence was the outline of a bilateral deal with the United Kingdom. Even though the agreement was relatively inconsequential from a macroeconomic standpoint (the U.K. remains a modest trading partner for the U.S., and one of the rare partners with which the U.S. runs a surplus), it provided useful clues about the Trump administration’s negotiating posture.

We learned that a 10% blanket tariff is the new floor for countries not embedded within the North American production chain. This figure was floated during the 2024 campaign but is now being tested in real time. We also learned that sector-specific tariffs remain negotiable. The U.K. secured an exemption on aluminum and steel in exchange for concessions on ethanol and beef, offering a clear template for future deals.

More revealing, however, was the Trump administration’s strategic pivot toward bilateralism.

The direct invitation extended to Germany, bypassing the European Union, underscores a key tactical shift. Negotiating one-on-one increases U.S. leverage and provides the administration with more visible political wins, so it’s no wonder that Germany redirected the call to Brussels.

But it also raises questions about the integrity of existing multilateral agreements. If bilateralism becomes the dominant strategy, the implications for USMCA renegotiations could be significant. Are we witnessing a return to a Canada–U.S. trade framework reminiscent of the pre-1994 era? The coming months will reveal whether this is a tactical deviation or a structural reorientation.

Détente with China followed soon after. By midMay, both countries had stepped back from what had become a de facto mutual embargo. Tariffs that had reached effective rates of 145% on U.S. imports and 125% on Chinese exports were suddenly scaled down to 30% and 10%, respectively. These are still elevated by any historical measure but, after April’s peak, were met with considerable relief by markets.

That being said, even in their revised form, these tariff levels are substantial. If current rates persist, we are staring at an average tariff regime of 10% to 15% for major partners, with China clearly being singled out. Just weeks ago, such an outcome would have been considered the bear case. Yet today the market interprets it as benign—a sobering reflection of how far sentiment has swung.

This disconnection between the market’s optimism and the reality of what’s being priced into the global trading system deserves close attention. The inflationary and growth consequences of such a structural shift in global trade have not yet surfaced in the hard macro data. But that doesn’t mean they won’t.

Pivoting from tariffs to fiscal fears

Even as the fog of tariff escalation began to lift, a new cloud emerged: rising anxiety over U.S. fiscal policy. We saw a swift transition in May as investors shifted their focus from trade disruptions to sovereign balance sheets. Moody’s provided the catalyst when it downgraded the U.S. sovereign credit rating from Aaa to Aa1 on May 17. Albeit symbolic, the move echoed the warnings by S&P in 2011 and Fitch in 2023. The rationale was clear: unsustainable fiscal deficits, mounting interest payments, and a lack of credible reform.

These warnings were amplified by the legislative progress of the “One Big Beautiful Bill,” which expands and extends the 2017 tax cuts. According to Congressional Budget Office estimates, the bill could add nearly $4 trillion to the national debt over the next decade. Markets took notice. The 30-year Treasury yield surged above 5.1%, a level last seen nearly 20 years ago, reflecting supply concerns and inflationary fears alike.

The timing could hardly be worse. The U.S. economy is already contending with the growth drag of elevated tariffs. Now, the stimulus expected from tax cuts may instead trigger bond market unrest, leading to higher borrowing costs for households, companies, and the government. This introduces a self-defeating loop: Fiscal expansion may crowd out private investment, while monetary policy remains constrained by inflation dynamics.

JP Morgan CEO Jamie Dimon, among others, flagged the growing risk of stagflation, namely sluggish growth, persistent inflation, and deteriorating confidence. May offered a glimpse into such a world: weak consumer sentiment, shaky PMIs, soft business investment, and bond auctions clearing at steep yields. A 20-year Treasury auction at mid-month required a yield above 5.04% to attract buyers, a sign that demand for U.S. debt may be weakening.

No data point is alarming in isolation. But, in the aggregate, the message is clear: The bond market is on edge.

With interest payments nearing $1 trillion annually, and deficit spending back in the spotlight, the window for fiscal manoeuvring is narrowing fast.

Unless a credible fiscal consolidation path emerges, the U.S. risks falling into a cycle of rising debt, rising rates, and reduced policy flexibility. In short, we may be moving from one macro crisis to another—or, worse, facing both simultaneously.

Macro signals: a lagging but looming threat

Despite these mounting pressures, headline inflation has yet to accelerate meaningfully. But that may not last. Multiple business surveys suggest price hikes are in the pipeline, and companies such as Walmart have openly announced price increases “within weeks” on select goods. The notion that U.S. retailers or Chinese exporters would fully absorb the cost of tariffs, thereby shielding the consumer, was always optimistic. Profit margins are now under pressure, and pass-through effects appear imminent.

A deeper complication lies in the divergence between soft and hard data. Sentiment indicators— consumer confidence, small business optimism, and manufacturing new orders—have weakened. Yet, hard data, including payrolls and personal income, remain solid. This mismatch is not unusual near turning points. Historically, soft data deteriorate first, followed by labour-market data and, eventually, spending and output figures.

An exception to this pattern unfolded in 2022 and 2023, when soft indicators flashed red, but the U.S. economy remained resilient. That said, this cycle may be different. Tariff-related price shocks, fiscal disarray, and policy paralysis could converge to create a more sustained drag.

We continue to expect the U.S. economy to weaken in the coming quarters. The impact of higher input costs, constrained credit conditions, and policy uncertainty will most likely dampen investment and consumer activity.

Globally, weaker U.S. demand and declining confidence in U.S. macro policy will act as headwinds, particularly for trade-oriented economies.

Market downturns in context: Is this one different?

The rebound in equity markets since early April has been impressive. But history suggests caution is warranted. Between February 19 and April 9, the S&P 500 dropped 18%—just shy of the 20% bearmarket threshold. That correction was event-driven, rooted in policy shock and sentiment dislocation, rather than structural or cyclical imbalances.

We reviewed 21 major U.S. market downturns since the Great Depression, categorizing them as:

• structural (financial crises, bubbles);
• cyclical (economic slowdowns); or
• event-driven (wars, pandemics, policy shocks).

This year’s episode fits best as an event-driven correction. The sharp rise in the U.S. risk premium was largely reversed as policy threats were dialled back. However, the bounce remains fragile, and the macro risks unresolved.

If the tariff shock proves to be the tipping point for a recession, history tells us drawdowns could deepen and become more prolonged. Markets tend to recover quickly from mild recessions and nonrecessionary corrections. But when economic deterioration is severe, markets often struggle for longer periods. A shift toward a structurally different economic model—one less reliant on consumption, debt, and external capital—would imply a more painful adjustment process. The current episode may yet evolve into something more persistent if the Trump administration resumes its hardline approach or if policy incoherence continues, but we remain open-minded about a more market-friendly scenario.

Scenario framework: mapping the road ahead

We outlined three scenarios in April. Since then, the path has narrowed, and the bear case has gained credibility. The situation remains fluid, and assigning probabilities is difficult, given the unpredictability of Trump-era policymaking. Still, it is worth restating our scenarios for the coming quarters with updated context.

Conclusion: The sugar coating has calmed markets, but the pill remains

The Trump administration’s pivot in May, from maximalist tariffs to strategic ambiguity, provided enough narrative support to lift markets off their April lows. But the policy fundamentals remain problematic.

The trade regime is structurally more restrictive than it was in the first quarter. Fiscal policy is becoming a source of concern, not stimulus. And the Fed, constrained by the twin risks of inflation and stagnation, finds itself on the sidelines. The sweet coating of recent headlines cannot obscure the bitter undercurrents of inflation, debt, and policy fragility. The risk is not of a single shock but of cumulative pressures—pressures that could turn this cycle from a sharp correction into a structural unwind.

Markets may want to believe that the worst is behind us. But history reminds us that rebounds without resolution rarely hold. For investors, this is a time for vigilance, not complacency.

Positioning

As stated last month, even though we have long acknowledged the strength and resilience of the U.S. equity markets, we think the balance of risks and opportunities favours a more global approach. Accordingly, we have moved to an underweight stance on U.S. equities and increased our exposure to international markets.

This shift is driven by several converging factors. First, we are seeing signs of capital reallocation out of the United States, a trend that appears to be gaining traction as investors seek diversification and more attractive valuations abroad.

Second, non-U.S. markets, particularly in Europe and parts of Asia, are benefitting from improving growth dynamics, supported by a combination of fiscal stimulus, a rebound in manufacturing, and more accommodative policy environments.

Third, valuations also play a key role in our thinking. As U.S. equities continue to command a premium, the relative discount of international equities has become increasingly difficult to ignore, especially as the macro backdrop abroad improves and capital returns home from the United States. We are mindful that valuation gaps alone are not sufficient catalysts; but in this case they are accompanied by a more constructive growth narrative and a potential easing of geopolitical headwinds.

We continue to monitor developments closely and remain flexible in our positioning. However, we think the current environment calls for a more balanced and globally diversified equity allocation, with a reduced emphasis on U.S. exceptionalism and a renewed focus on opportunities beyond North America.

We remain underweight fixed income, as the macro and policy backdrops continue to exert upward pressure on yields, particularly at the long end of the curve. Even though bonds continue to offer diversification benefits and a potential hedge against equity volatility, we think the risk-reward profile remains challenged in the current environment.

The fiscal dynamics in the U.S. are a key concern. With the budget deficit projected to exceed 6% of GDP this year and to widen further in 2026, the supply of government debt will remain elevated. This persistent issuance, combined with only partial offsets from spending cuts, is likely to keep term premia under pressure, challenging the notion of a durable bond rally. As the structural demand for capital, driven by both government and corporate financing needs, continues to rise, the upward bias in yields is reinforced.

At the same time, central banks appear in no rush to ease policy aggressively. Even though sentiment indicators are softening, hard data, particularly in labour markets and consumer spending, remain resilient. This divergence between soft and hard data has kept policymakers cautious, with the Federal Reserve and other central banks signalling they prefer to wait for clearer signs of economic deterioration before committing to a more dovish stance.

Accordingly, the market may again be disappointed in terms of rate cut hopes and expectations in the near term. In this context, we prefer to stay underweight duration and maintain flexibility in our fixed income exposure. We continue to monitor developments closely, particularly fiscal policy, inflation dynamics, and central bank communication. Should the data shift meaningfully, or financial conditions tighten abruptly, we stand ready to reassess our positioning.

In currencies, we still have an overweight position in the Japanese yen, which we view as one of the most compelling opportunities in the currency space. Several structural and cyclical factors are aligning in support of the yen.

First, the likelihood of repatriation of foreign assets by Japanese investors is rising. With Japanese investors having massive exposure to U.S.-dollar assets and offshore exposure accounting for a large part of their portfolios, even a modest shift in allocation preferences could have a meaningful impact on currency flows.

Second, the back end of the Japanese yield curve has steepened materially, driven by expectations of further Bank of Japan normalization amid sustained inflation and wage growth.

This context has made domestic Japanese assets more attractive on a relative basis, particularly as the appeal of U.S. fixed income diminishes in light of rising fiscal risks and a weakening dollar. The combination of higher local yields and a reduced appetite for unhedged foreign bond purchases is likely to support a trend of yen appreciation. Moreover, the yen retains its safe-haven characteristics, particularly in an environment of elevated uncertainty.

We are also overweight the Canadian dollar. Even though the imposition of U.S. tariffs has understandably raised concerns, we think the consensus may be overestimating the potential damage to Canadian growth. Canada’s macro fundamentals have weakened, but not precipitously so, and the currency stands to benefit from any upside surprises in domestic data or signs that the tariff impact is less severe than feared. In this context, the Canadian dollar offers both cyclical upside and a degree of insulation from broader U.S.- dollar weakness.