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Survey-based data available for September show weakening US growth momentum, supporting modest defensiveness. While the government shutdown may delay official releases, soft data provide a timely view. Our US economic diffusion index, combining more than 80 indicators, points to slowing momentum. Of the 51 soft indicators tracked, 45 are available for September, and less than a quarter increased on the month. The data is volatile; our smoothed version shows about 45% of indicators rising, extending the downtrend that began at the start of the year.
Hard data for September is still limited, but our hard data subindex has also been losing momentum from April to August. This stands in contrast to the Atlanta Fed GDPNow estimate of 3.8% annualized Q3 growth, similar to Q2. Despite hard data releases being delayed due to the government shutdown, the broader evidence suggests growth is weakening enough to allow the Fed to keep easing at its October meeting.
This backdrop supports modest defensiveness: Neutral equities, overweight government bonds, and underweight credit. With elevated inflation, slow growth deterioration is needed to preserve easing and sustain the expansion, and paradoxically the S&P 500. Our data tracking does not show collapse or accelerating weakness. However, downside growth risks remain too high for an overweight in risk assets as the labor market hovers near neutral estimates.
Our tactical framework, which tracks the reflexive loop between financial conditions and economic surprises, points to stronger near-term growth, leaving equities vulnerable if inflation re-accelerates. Data surprises move markets, while bond yields and the USD in turn shape growth outcomes through financial conditions. Strong economic data tightens financial conditions, eventually weighing on growth. This loop means robust growth often plants the seeds of its own reversal, and vice versa.
US data has weakened in recent months, especially after labor revisions left the macro picture weaker than first thought. This has pushed the Fed to re-evaluate its balance of risks toward unemployment rather than inflation, a shift that was well anticipated and helped ease financial conditions. Since May, conditions have loosened; first through a weaker USD, then through lower bond yields since July. These easier conditions should create a short-term growth impulse and buoy economic surprises.
The cross-asset implications are clear. Yields may stay rangebound: Not a tailwind for equities anymore, but not a headwind unless inflation re-accelerates. Broadly rising inflation would reverse aggressive Fed cut pricing, spike rates volatility, and trigger an equity pullback. While not our base case, this “inflation scare” remains the main tactical risk. The danger is greater as the stock-bond yield correlation remains negative, creating an environment where good macro news would be bad news. For now, our macro data tracking shows steady momentum loss in both hard and soft data, pointing to below-potential growth in the coming quarters.
Powell’s “risk management cut” underscores the Fed’s shift toward growth risks, reinforcing long duration with steepeners.
Risk management is central to monetary policy. It determines how policymakers balance uncertainty and decide which mistake is less costly: Cutting too soon and risking inflation, or waiting too long and deepening a slowdown. Powell’s Jackson Hole speech signaled the Fed’s focus has shifted toward growth risks, a stance reflected in Wednesday’s decision.
A cut while inflation is above target does not mark a retreat from the 2% mandate. The fed funds rate remains above the Fed’s 3% neutral estimate, keeping conditions restrictive, not easy. Recent inflation has been driven by tariffs-induced goods prices, largely beyond the Fed’s control, while services inflation hinges on the labor market, which has loosened significantly this year. Supply-side shocks such as tariffs are typically “looked through” so long as inflation expectations remain stable.
Central banks face a volatile mix of growth and inflation shocks, making stable expectations and flexible policy critical. For now, expectations remain anchored, with the 5y/5y and 1y/1y inflation swaps within the Fed’s 2.3%-2.5% PCE-equivalent target range. We recommend global bond investors maintain long duration and steepeners. In the US, the easing path is well priced, so our US Bond strategists tactically hedge duration with a short Jan 2026/long Dec 2026 fed funds futures trade.
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.