US bond yields have declined over the past couple of months, and gold has touched records levels. Global and US equities have also reached new highs on the back of expectations of continued economic strength in the US, the monetary easing cycle, earnings resilience, and AI-led momentum. We see an inherent contradiction here, but agree with the monetary easing aspect. The contradiction arises from the view that if the Fed implements rate cuts mainly to address a slowing economy, then the effects of a slowing economy should already be evident in weak labour markets, consumption, and eventually in corporate earnings. 

The aforementioned topics, including economic growth, inflation, and monetary easing, will likely unfold as follows: 

• A stagflationary environment gaining ground in the US (slowing economic growth, with high inflation expected in the near term). A deceleration in consumption will be the key variable affecting growth in the second half this year, as labour markets continue to soften and concerns over wage growth persist. On the other hand, we expect the CPI to remain above the Fed’s 2% target in the near term, and pick up in the coming months. Consequently, real income growth and disposable income will be squeezed.
• The Fed and BoE may be forced to reduce policy rates (despite sticky inflation) as pressures on the growth front increase. We maintain our expectation of two further rate cuts by the Fed this year, each of 25 basis points, and two more in 2026, with terminal rates reaching around 3.25% by the end of the first half of next year.

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