Labor Market

Euro area and Chinese interest rates must fall much further to prevent monetary policy from becoming ultra-restrictive. But Trump’s attempts to force unwarranted rate cuts from the Fed risks a vicious backlash from the bond vigilantes.

Despite macro headwinds, the OBBBA clearly favors Industrials, Financials, and Consumer Discretionary equity sectors. A carefully constructed, factor-aware basket in these sectors is well positioned to outperform in a fiscal-driven, uncertain environment. 

We still believe a recession looms, but it has yet to rear its ugly head. We continue to recommend investors position defensively, but we will change tack if clear signs of a recession don’t emerge soon.

We will abandon our recession call if US economic data show clear signs of stabilization over the summer months. For now, that has not happened. Maintain a modest underweight to stocks but look to get more defensive if MacroQuant’s equity z-score falls below -1.

Upward pressure on Japan’s real bond yield justifies overweighting the yen and underweighting overvalued tech. Plus: two new tactical trades are long JPY/EUR and short platinum.

June’s employment report showed a tick down in the unemployment rate, an improvement that rules out a Fed rate cut later this month.

Acute geopolitical risks, like a massive oil shock, may be abating. But structural geopolitical risk remains high and could upset a blithe market. Cyclical economic risks are underrated as the US slows down and China continues to stumble. Investors should book some profits in anticipation of tariff implementation and a downturn in hard economic data.