Insights

Dollar softness has had little growth impact, and European equities should keep lagging. A key 2025 trend has been USD depreciation, but the associated easing in financial conditions has offered minimal support to US growth, reflecting higher term premia rather than a genuine liquidity boost.

Yields remain sticky relative to fundamentals, and dollar weakness reflects diversification out of US assets rather than a stimulus-driven liquidity impulse. US economic surprises have recovered, yet the tailwinds from easier conditions are unlikely to be meaningful, although they are at least not a headwind. In Europe, by contrast, EUR strength and higher Bund yields have tightened financial conditions, compounding headwinds from weak global growth.

These factors have already weighed on relative equity performance versus the US and should continue to do so in the near term. Our negative convexity base case for the US still points to an AI-driven rally absent clear recession signals. With the DXY having tactically bottomed, the path of least resistance is further European underperformance, which strategic investors can use as a buying opportunity.

May JOLTS data suggest labor market softening beneath the surface, reinforcing a defensive stance across portfolios. Job openings rose to 7.7m from 7.4m, beating estimates, while quits ticked up to 3.3m and layoffs fell to 1.6m. However, hiring edged lower to 5.5m, and openings in cyclical sectors remain in a downtrend, pointing to fragility in the more economically-sensitive areas of the labor market.

Despite apparent resilience, the JOLTS report lags by a month and contrasts with weakening leading indicators of employment. Consumers are turning more cautious, and hiring remains soft in sectors most exposed to growth fluctuations. Moreover, jobs are reportedly getting harder to get. Historically, recessions begin not with a spike in layoffs, but as hiring slows and labor market slack gradually builds. With current conditions roughly balanced, it will not take much of a slowdown for slack to emerge.

We remain underweight risk assets and overweight government bonds within a global portfolio. BCA’s US Equity strategists recommend lowering beta and reducing exposure to cyclical sectors. 

A falling dollar usually eases financial conditions, but recent dollar weakness is unlikely to reverse negative growth surprises, reinforcing our call to sell risk assets on strength. Our tactical framework tracks the reflexive loop between financial conditions and economic surprises: data surprises move markets, but bond yields and the USD in turn shape growth outcomes by tightening or loosening conditions. This feedback loop means growth strength often plants the seeds of its own reversal, and vice versa.

While recent dollar softness might suggest easier financial conditions, context matters. Yields remain sticky, and USD weakness reflects diversification out of US assets rather than a broad liquidity impulse. As a result, the move is unlikely to support growth or risk sentiment.

US economic surprises remain negative, and that momentum is unlikely to shift near term. Risk assets have decoupled from fundamentals, pricing in optimistic policy outcomes. Even if trade de-escalation provides a short-term boost, a global baseline tariff rate near 10% will weigh on growth and likely trigger a recession. We recommend fading strength in risk assets as recession risks remain underpriced.

The stock-bond yield correlation is stabilizing after months of jitters, setting the stage for renewed Treasury demand as recession risks build. A negative correlation typically points to inflation concerns, while a positive one reflects growth optimism. In recent months, however, this signal broke down amid heavy selling of US assets. The correlation then turned neutral, stripping Treasuries of their usual diversification value.

The US-China trade truce reignited a risk-on move, lifting both equities and bond yields. With inflation still tame globally and US-specific pressures isolated, the stock-bond yield correlation is unlikely to flip negative again. Fiscal risks linger as Washington pivots from trade to budget negotiations, yet the administration’s quick reversal after a bond selloff shows there are political limits to fiscal brinkmanship.

Treasuries may not rally as strongly as in past recessions, but they will remain the safe-haven as signs of labor market stress emerge. Our Global Fixed-Income strategists are neutral for now, but Treasuries are on upgrade watch. US curve steepeners remain a convex way to position for either bull steepening in a recession or bear steepening in a fiscal scare. 

The Q1 US GDP contraction and inflation dynamics reinforce our defensive asset allocation. GDP missed estimates and contracted -0.3% annualized, led by a sharp slowdown in net exports. Consumption slid to 1.8% from 4.0%, reflecting falling consumer confidence. Business investment rose modestly, likely due to tariff-driven frontloading, evidenced by a spike in inventories and falling capex intentions. Residential investment slightly detracted from growth. Frontloaded demand and inventory accumulation will weigh on Q2 growth as new orders fade.

March personal consumption was decent, driven by autos, but spending outpaced income, pushing the saving rate down to 3.9%. Given weakening employment indicators, the saving rate has limited downside. Input costs are rising due to tariffs, especially in goods, yet delivery times remain stable, a key difference from the COVID inflation shock, when supply chains were strained. The Fed will focus on anchoring short-term inflation expectations. The result is a restrictive policy stance that will persist despite softening growth, supporting our preference for long duration exposure.

Soft data continues to deteriorate and hard data will soon follow, reinforcing our defensive asset allocation. Consumer and business confidence have plunged as policy uncertainty and inflation expectations rise, with spending, hiring and capex plans softening.

March retail sales were decent but mixed: Headline growth was strong at 1.4% m/m, but the control group missed at 0.4%, down from 1.0%. Core sales excluding autos and gas rose 0.8%, suggesting some frontloading ahead of tariffs. Restaurant sales held up, but downside risks remain high as uncertainty lingers and confidence falls, which will lead to a higher saving rate.

Industrial production declined 0.3% m/m, with capacity utilization falling to 77.8%. While hard data has yet to show a deep slowdown, leading indicators suggest weakness is coming. Given those risks, we remain underweight risk assets, and overweight government bonds.

April 2 may mark peak trade tensions, but the path forward remains highly uncertain, supporting our underweight on risk assets and industrial commodities. The USTR’s long-awaited report on trade barriers will guide the next phase of US trade policy. While the report only contains a total of 13 pages on Canada and Mexico, suggesting tensions there may be resolved quickly, China and Europe dominate the focus with 48 and 34 pages, respectively. These figures offer a proxy for where the next trade fights are likely to escalate.

We expect “Liberation Day” to mark the presentation of maximalist US demands, framing the opening salvo in a new round of trade negotiations. A shift in US trade focus toward China and Europe will only increase global policy uncertainty as the rules of international trade are rewritten. Even if markets find relief in the near term, global risk assets are not priced for a prolonged period of trade-driven instability.  

Our tactical framework highlights how financial conditions and economic surprises interact, where growth often sows the seeds of its own demise. Markets price expectations efficiently but lack perfect foresight, making data surprises key to price action. Growth surprises tighten financial conditions by raising yields and strengthening the currency, slowing growth until weaker data loosens financial conditions and reignites positive surprises.

The US and Euro Area are currently at odds in this cycle. US economic surprises fell short of lofty expectations, while European forecasts had become so pessimistic they could only improve. Disappointing US data sent stocks lower yet eased financial conditions through lower bond yields and a weaker dollar, which will soon become a tailwind for economic data. In contrast, euro and bund spikes tightened European financial conditions, weighing on activity that will stay weak until fiscal stimulus is deployed.  

Tactical investors should consider taking profits on long Europe trades, as the trend is getting extended. However, short-term dips in European assets create buying opportunities for long-term investors. EUR/USD should be bought after falling below 1.05, while German bunds should be sold on dips below 2.3%. Traders expressing the idea in the rates space should consider going long the December 2025 3-month ESTR futures contract vs. its SOFR counterpart.
 

President Trump’s inaugural speech outlined his second term agenda. The theme was that the US will become “far more exceptional” than it already is. Trump pledged to reverse America’s decline, rebalance the justice system, streamline government, protect borders, pare back inflation, restore manufacturing, surge energy production, impose tariffs on trade, and make peace abroad. Trump declared two national emergencies: One on the southern border, and one on energy production.  

Trump said the US will impose tariffs to protect US manufacturing. This would include creating an External Revenue Service to collect tariffs, implying a vested interest in tariff collections. On foreign policy, the military will focus on its main objective of war, but success would be measured by ending wars and staying out of wars, implying negotiations on Ukraine and in the Middle East.  

However, he reserved his fighting words for Panama, lamenting the alleged abuse of the US treaty ceding the Panama Canal. He said the US was “taking it back,” opening the potential for military action even though the more likely consequence is simply a renegotiation of relationships in an area where US influence is already overwhelming.  

For investors, the takeaway is that the Trump administration will be proactive, not reactive; unilateral, not multilateral; and hawkish, not dovish, on global trade and immigration. Equities remain expensive given the risks ahead.  

Our Geopolitical Strategy team published their annual outlook, and see three trends shaping 2025.  

First, Congress is expected to pass tax cuts by the end of 2025, providing a fiscal thrust of 0.9% of GDP in 2026. This stimulus will likely embolden Trump to impose tariffs on major trade partners. This will lead China to retaliate by stimulating its domestic economy and strengthening trade ties globally, while Europe is also expected to respond. Finally, geopolitical risks will shift from Ukraine-Russia, which may approach a ceasefire, to escalating tensions between Israel and Iran, likely reaching a crisis point in 2025.  

In this volatile environment, our colleagues recommend staying long the USD and JPY vs. EUR. On equities, they also recommend being long US small caps relative to global ones, aerospace/defense vs. the broad market, Singapore over Taiwan, and Canadian energy vs. the Canadian market. Our geopolitical strategists anticipate pivoting into international stocks and emerging markets past the initial tariff shock.