Macro
Recent U.S. economic data continue to show that Trump’s policies have yet to produce any meaningful impact on inflation or growth. The consensus expectation of an inflationary shock has not materialised. Inflation remains close to the Fed’s 2% target, while activity indicators suggest continued strength, with recent business surveys showing the fastest pace of private-sector expansion this year.
Even before measurable inflationary effects appear, tariff revenues have already begun flowing into Treasury coffers, indicating that the fiscal impact is taking shape ahead of schedule. The next phase of the tariff cycle now hinges on the August 1 deadline, when the current “pause” expires for most trading partners. The administration is finalising frameworks with Japan, the EU, and the U.K., each converging toward a 15% baseline rate, effectively the new floor for U.S. trade policy. However, the lack of fully ratified terms and ongoing debates over sector-specific exemptions in autos, steel, aviation, and industrial goods keep near-term uncertainty high. The EU, negotiating as a 27-member bloc, must also navigate U.S. demands for broader agricultural access and adjustments to VAT, adding complexity to the process.
For now, most importers continue to absorb a large share of tariff costs, helping contain inflation. Analysts note that the U.S. economy remains resilient, even as companies adjust supply chains and production footprints to reflect a likely 10% to 25% tariff band. While these frameworks may offer stability over time, they have yet to deliver the clarity markets are hoping for.
Globally, China’s policy stance reinforces the reflation narrative. Export volumes of rare-earth magnets rebounded in June as Beijing eased earlier restrictions, reducing supply pressures in advanced manufacturing. Domestically, the government has launched a 1.2 trillion yuan hydropower project in Tibet as part of a renewed push for large-scale infrastructure and clean-energy investment. These moves underline Beijing’s intent to stimulate growth and strengthen regional influence through fiscal expansion.
Forecasters who initially warned of near-term shocks are now pushing back their timelines. They expect earnings growth to slow below 8%, inflation to rise modestly above 3%, and GDP growth to decelerate to roughly 1.5% later in 2025. Europe, meanwhile, is showing tentative signs of revival, supported by fiscal outlays and defence-related investment even as export orders soften.
Beyond trade, Washington’s domestic policy tightening on education and multilateral funding, including cuts to public media, aid agencies, and universities, signals a further inward turn in U.S. governance. While these actions have limited near-term economic impact, they reflect a broader shift in national priorities that could influence innovation, research, and soft-power competitiveness over time.
Even in the absence of a leadership change, the expected transition at the Federal Reserve is shaping market expectations. With Jerome Powell’s term ending in May 2026, investors anticipate a more dovish successor, fueling renewed momentum in inflation-sensitive assets such as gold, silver, bitcoin, and yield-curve steepeners.
Globally, reflationary momentum is broadening. China’s fiscal expansion, Europe’s fiscal impulse, and U.S. trade-linked investment all point to synchronised policy support rather than fragmentation. The combined weight of these policies suggests that global growth could remain firmer for longer, even if the path there remains uneven.
Rates
We begin this update with the Japanese rates market, where the Bank of Japan raised interest rates for the first time in 17 years. Alongside the hike, it scrapped its yield curve control framework and ended ETF purchases. Surprisingly, this shift led to a weaker yen, which fell to 150 per USD. For the BoJ, this outcome was welcome; it marked an orderly exit from its ultra-loose policy without triggering market instability.
Global sovereign markets traded mixed over the week, with the U.S. yield curve flattening modestly. Short-dated yields rose by around 4 bps, while the long end eased, leaving the 30-year Treasury roughly 7 bps lower. The dollar softened against major currencies, highlighting the market’s expectation that monetary policy across developed economies may soon diverge again.
In the U.S., the debate over rates remains dominated by politics as much as by economics. President Trump has signalled a desire to expand executive influence over the Federal Reserve, publicly criticising Chair Powell and hinting at potential replacements. While such rhetoric may aim to energise his political base, it introduces policy uncertainty that could unsettle markets if it intensifies. For now, investors see little chance of a rate move at the upcoming FOMC meeting, though softer data releases have added pressure on the Fed to deliver at least one more cut by September.
Elsewhere, global funding conditions remain favourable. Recent sovereign auctions underscored continued investor demand, with the U.S. successfully issuing 20-year Treasuries at yields around 4.9%, unchanged from the previous auction. Germany’s 10-year auction cleared slightly lower at 2.62%, while the U.K. faced modest upward pressure, paying above 5% for long-dated gilts. Japan’s 40-year issuance also priced higher at 3.4%, reflecting the end of its yield-curve control era but not signalling stress in funding markets.
Overall, global rates remain anchored in the Fed’s on-hold regime, centred on whether inflation will reaccelerate in the second half of the year. Economists expect tariffs to have a delayed but noticeable impact on prices. Growth remains resilient, suggesting inflation could stabilise near 3%, an uncomfortable level for a central bank targeting 2%.
Yield volatility has eased from last year, and many investors expect the 10-year yield to remain within a 4.20% to 4.60% range. The steepener trade remains popular following two years of inversion, though consensus positioning leaves it vulnerable if growth slows further. Markets now price roughly 75 bps of Fed cuts in 2026, up from just 25 bps in April, reflecting a shift toward longer-term easing expectations. The 5s30s spread, now around 43 bps, illustrates the delicate balance between optimism and caution.
September is no longer viewed as a likely cut date, given continued labour-market strength. Still, if policy remains unchanged into autumn, political tension could mount, with growing speculation that the administration may seek greater sway over monetary policy. A symbolic 25 bps move later this year would likely serve more as a signal of flexibility than an actual policy pivot.
Across the Atlantic, the U.K.’s rate path increasingly mirrors that of the U.S., though domestic inflation dynamics remain more asymmetric. Headline CPI rose to 3.6%, but inflation swaps imply a sharp moderation ahead, suggesting that the Bank of England may ultimately need to ease more aggressively than markets currently expect.
Finally, the correlation between bonds and equities has declined as inflation pressures moderate, restoring the diversification role of Treasuries in balanced portfolios. The drop in cross-asset correlations provides a rare opportunity for investors to rebuild traditional portfolio hedges after several years of elevated co-movement between stocks and bonds.
Credit
July saw a surge in high-yield issuance, with $27.6 billion in sales, making it the highest monthly volume since 2021. A standout deal came from AI leader CoreWeave, which raised $1.75 billion in junk bonds to refinance its existing debt. The leveraged loan market was also exceptionally active, with $85 billion issued this week alone, marking the second busiest week on record. Monday was particularly notable, as borrowers secured $61 billion in loans, the second-highest daily volume in history.
At the same time, structural shifts are underway in the construction of fixed-income indices. The sharp rise in government borrowing, driven by pandemic-related stimulus, infrastructure spending, and higher interest costs, has significantly increased the share of Treasuries in major bond indices such as the Bloomberg U.S. Aggregate Bond Index. This trend has led to greater concentration in government securities, altering the overall risk-return profile of these benchmarks.
As Treasuries have come to dominate a growing share of index composition, the relative weight of credit instruments has declined, leading to lower yields and reduced spread exposure. Passive investors, by default, are increasingly allocated to lower-yielding government bonds. In response, institutions are pivoting toward custom or credit-enhanced benchmarks to maintain adequate income and credit exposure.
These developments underscore the need for a more actively managed, multi-sector fixed income approach. With traditional benchmarks offering limited yield, managers with the flexibility to allocate across sectors can selectively add high-quality credit. This strategy helps preserve portfolio quality while potentially generating an additional 200 to 250 basis points over money market funds.
In terms of opportunities, agency and non-agency mortgages appear attractive, offering reasonable valuations relative to other corners of the credit market, many of which trade at historically rich levels. On average, mortgage-backed securities offer spreads around 150 basis points. Bonds also appear more attractive than leveraged loans at this stage, as the latter may lose some of their carry advantage if the yield curve steepens, whether driven by a strong macroeconomic backdrop or by recession risk.
Elsewhere, the outperformance trade in bank debt, which began during the regional banking crisis in mid-2023, appears exhausted. Valuations have now normalised, with bank bonds pricing in line with the broader investment-grade universe.
We’re also beginning to see a pickup in credit issuance linked to M&A activity, signalling rising boardroom confidence. While still a small share of overall issuance, it’s a notable shift. That said, refinancing remains the dominant use of proceeds, and the overall level of new borrowing has yet to meaningfully change the leverage profile of U.S. corporates.
Finally, there’s an apparent technical bid for credit as institutional investors return to the market following the subdued issuance period post-‘Liberation Day’ lull. With corporate balance sheets still healthy and equity markets pushing to new highs, managers are shedding their defensive stance and re-entering the credit space. However, caution is warranted. With spreads this tight, credit has become increasingly correlated with equities, amplifying downside risk. Particularly as signs of froth emerge in equity markets and volatility remains unusually compressed.
Equities
U.S. equities advanced for another week, with all major indices finishing higher and the S&P 500 and Nasdaq closing at record levels. The Dow gained 1.26%, the S&P 500 rose 1.46%, the Nasdaq added 1.02%, and the Russell 2000 climbed 0.94%. Strength was broad-based but again anchored by large-cap technology and retail-investor favourites, underscoring continued appetite for growth and liquidity-driven themes.
Sector performance was mixed but leaned cyclical. Healthcare led the week (+3.4%), followed by Materials (+2.4%), Industrials (+2.3%), and Real Estate (+2.2%). Communication Services (+2.2%) and Financials (+1.7%) also posted solid gains, while Technology (+0.7%) and Consumer Discretionary (+1.2%) lagged. Defensive areas such as Consumer Staples (+0.0%) and Utilities (+0.9%) underperformed, and Energy (+1.4%) posted modest gains.
Earnings dominated headlines this week, with 112 S&P 500 companies reporting. The season has broadly exceeded expectations so far, with blended year-on-year earnings growth at 6.4%, above the 4.9% expected at the end of June. However, the average magnitude of beats (+6.1% vs. consensus) remains below recent one- and five-year averages, suggesting solid but not euphoric results. Standout performers included Alphabet (+4.4%) on stronger Search, YouTube, and Cloud revenue; Thermo Fisher (+15.3%) and Danaher (+8.1%) in life sciences; and T-Mobile (+7.2%) with healthy subscriber gains. In contrast, Tesla (-4.1%) and Intel (-10.4%) disappointed on forward guidance, while parts of the semiconductor and consumer sectors underwhelmed. The tone of management commentary was more cautious, highlighting margin pressure and lingering tariff-related uncertainty.
Despite continued scepticism, the market rally has been underpinned by robust buying activity from three key groups. Corporations are repurchasing shares at a near-record pace, with daily buybacks averaging around $4 billion. Retail investors are aggressively allocating capital to equities, with U.S. households now holding roughly half their wealth in stocks, surpassing the previous dot-com peak. International investors, too, continue to favour U.S. markets, defying expectations of a rotation toward Europe or emerging economies.
Scepticism lingers around the AI rally, particularly whether current investment levels can be justified by future revenue. Yet the adoption of AI by U.S. companies has been faster than any prior technological shift, including the internet. Eight of the ten largest AI platforms globally are American, and the top five U.S. tech giants dominate as enablers. AI remains the strongest momentum theme, though there is a contrarian risk if growth overshoots and rates fall sharply, conditions that could revive leadership in cyclicals and small caps.
Nvidia remains the clear beneficiary, with a $4 trillion market cap reflecting its dominance in supplying the computing power behind large language models. Token usage across leading LLMs is surging, and mass adoption is set to accelerate GPU demand, where Nvidia remains unmatched in scale. Alphabet, meanwhile, is regaining ground with its Gemini 2.5 model and deeper AI integration across products, raising the question of how quickly monetisation can offset pressure on search revenues.
Signs of froth are emerging, particularly in high-beta and heavily shorted names. For the first time since 2021, retail investors are again targeting short sellers, sending stocks such as Kohl’s, OpenDoor, Krispy Kreme, and GoPro soaring, often on sentiment rather than fundamentals. The Goldman Sachs Most Shorted Rolling Index has surged by more than 60% over the past three months, while option activity reflects heightened speculation as put-to-call ratios near cycle lows.
Institutional investors remain underexposed, having trimmed risk earlier in the year amid policy and geopolitical uncertainty. Markets, however, rarely peak in disbelief. Historically, sustained rallies tend to fade only when consensus turns euphoric.
At 17.5× forward P/E, valuations are elevated but supported by resilient earnings growth despite a string of macro shocks. Trade headlines also added optimism, with new bilateral agreements announced between the U.S. and Indonesia, the Philippines, and Japan, as well as reports of progress toward an EU-U.S. deal. These developments have eased some tariff-related fears, even as analysts caution that effective tariff rates are set to rise this year. Cryptocurrencies have also drawn renewed institutional and corporate attention, with over $20 billion in new Bitcoin allocations and rapid growth in stablecoins, now accounting for 30% of Ethereum’s transaction fees.
Overall, earnings season continues to outperform expectations, and deal-making momentum suggests improved corporate confidence. With valuations stretched but supported by solid fundamentals, the path of least resistance for equities remains higher, though the margin for policy or earnings disappointment has narrowed. Next week, attention shifts to results from Meta, Microsoft, Apple, and Amazon, which will provide a key gauge of sentiment and durability of leadership at these elevated levels. Microsoft, Apple, and Amazon are all set to report. These results will serve as a key litmus test of both AI momentum and broader tech leadership.