Economics for Investment Q3 - Markets rise despite policy worries

Our flagship publication is just released to clients. We cover the economic and investment outlook for the US, China, UK, Euro zone and Japan.

As well as concern over US tariffs there are increasing worries over fiscal deficits, In the US the Big Beautiful Bill expands the US deficit while the UK, France, Japan and China are all struggling to generate growth in the face of high government debt burdens. Despite these worries stocks have staged a V-staged recovery and corporate spreads have closed in.

We share market optimism in three respects. First, inflation is nearly beaten which should allow interest rates to come down further.

Secondly, the economic recoveries in the UK and Europe should continue now that the Ukraine war shock is behind us and with interest rates falling. Meanwhile US growth will likely slow near term as the tariffs bite but could strengthen next year as new tax cuts (tips, overtime) and spending on the border and defence work through.

Finally, while we are sceptical of government efforts to improve productivity we are optimistic on AI and robotics over the medium term.

Biggest risks - inflation fails to fall further so that the Fed starts to raise rates again, and AI/robotics turns out to be a slow build so productivity growth stays low. This could also upset the business models of the Magnificent Seven.

In our Focus this quarter we look at what is driving US bond yields. US 10-year yields have risen since the Fed started cutting rates, an unusual occurrence. We conclude that a range of 4-5% is likely now 'normal', due to concerns inflation could run higher than in the 2010's and worries over the fiscal position.  

For a copy please email info@tricio-advisors.com