Labor Market

Investors should anticipate above average Treasury returns during the next 12 months, and curve steepeners will continue to profit.

The fact that the US economy has been slower to deteriorate than in past cycles is entirely consistent with our kinked Phillips curve framework. We will be looking to our MacroQuant model for guidance on when to turn fully defensive.

Jay Powell won’t be removed as Fed Chair before the expiry of his term next May, but we will learn the identity of his replacement this year, setting up a potentially awkward “shadow Fed Chair” situation.

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.