Policy

Looking through month-to-month volatility, job growth’s underlying trend is stable and consistent with a flat-to-slightly higher unemployment rate.

Policy risks are set to fade just as markets underestimate hawkish Fed repricing and crowd into short-USD positions, setting the stage for a tactical dollar rebound into the election cycle. Go long USD/CHF to capture the rate differential and receding policy uncertainty. 

The neutral rate in the US is being propped up by a variety of forces that are at risk of reversing. These include the AI capex boom, large budget deficits, and the extraordinarily high level of household wealth. As such, interest rates are likely to surprise to the downside over the next few years.

Core inflation will get close to the Fed’s 2% target by the end of this year.

The labor market tightened in January, significantly lowering the odds of a H1 2026 rate cut. Rate cuts driven by lower inflation are still likely in H2 2026.

Ignore Japan's constitutional debate. Rearmament will accelerate anyway. Tech, defense stocks, and industrials will benefit. The threat to JGBs is real but will probably be contained.

The US residential real estate market remains soft. While the decline in mortgage rates is a positive, it is too early to bet on housing becoming the engine of growth for the US economy this year.

The Fed will keep rates on hold in H1 2026, but dovish policy surprises are likely in the second half of the year.

Recent economic data have been reasonably firm. We will cut our 12-month US recession probability to 40% from 50% if the Supreme Court strikes down President Trump’s tariffs. This would take our scenario-weighted year-end 2026 price target for the S&P 500 to 6375 from 6200.

This morning’s CPI report signals that the worst of the tariff impact on inflation may already be in the rearview mirror.