Reasons for optimism?

The tariffs saga continues

After the US Court of International Trade ruled President Trump’s sweeping tariffs on imported goods from almost every foreign nation were illegal, a federal appeals court in Washington DC has temporarily halted the decision and reinstated the levies for now. As the Trump administration's appeal works its way through the courts, uncertainty will still linger.

However, given alternative routes of implementing the tariffs (as granted by the US Trade Act of 1974), the ultimate end-goal is unlikely to have changed. Equity markets seem to agree, and have remained relatively sanguine over the last week, while US government bond yields remain slightly below where they stood prior to the court ruling.

US President Trump’s “One Big Beautiful Bill Act” caught investors’ attention for the wrong reasons.¹ The bill was narrowly passed by the US House of Representatives on 22 May and is currently awaiting senate consideration. Within it, there is a clause which lays out a set of retaliatory taxes that the administration can levy on foreign capital invested in the US if it deems the nation as having “unfair” or “discriminatory” taxes on US imports.

While the exact group of assets subject to this clause is not clear, around 30% of all US Treasuries and corporate credit instruments are held by foreigners,² and further income flows from major global investment vehicles could potentially be disrupted if Section 899 is enacted.

US President Donald Trump has signed an order doubling tariffs on steel and aluminium imports from 25% to 50%, after making the announcement on 30 May. Unsurprisingly, the response was relatively short-lived: equities sold off on an intraday basis but recovered swiftly. (Note that past performance is not a reliable guide to future performance.)

Lastly, the minutes of this month’s Federal Open Market Committee meeting were a reminder that the Federal Reserve remains a critical player in both markets and the real economy. The tone from the minutes suggested a prolonged period of holding policy rates and the thinking behind the stance was largely driven by the potential inflationary impacts of US tariff policy.

US jobs market

Turnover data from the JOLTS report (the Job Openings and Labor Turnover Survey) – one of the high-quality barometers of US labour market dynamics – is signalling a clear stabilisation in the jobs market since last summer. Hiring stopped falling and quits followed a few months later. Layoffs remain very low by historical standards – and lower than you would expect given the current US unemployment rate (4.2%). They are higher than they were a year ago, but this appears to have been a one-time increase rather than the beginning of a new trend.

There are some indications of potential weakness in the US labour market, however. For example, data show it's taking job seekers longer to find work, and continuous US unemployment insurance claims spiked up in May. However, these signs have had limited influence on aggregate labour market outcomes so far.

Interestingly, and contrary to expectations of some market participants, the DOGE (Department of Government Efficiency) initiative has not resulted in a drastic reduction of federal employees – instead, there continues to be a reduction in the number of federal employees claiming unemployment insurance.

European Central Bank convenes

Eurozone headline inflation rose 1.9% in May, below consensus expectations (2%). Services inflation (3.2%, down from 4% and at the lowest level since March 2022) appears to be a significant contributor to the downside surprise. Firstly, investors were already expecting a reduction in interest rates at this month’s meeting, and this softer inflation print removes potential impediments in their path.

Furthermore, while this single inflation print does not suggest a rise in the number of interest rate reductions, it will increase the European Central Bank’s confidence in the gradual decline of inflation and allow for communication to focus on downside risks to inflation as well.

Investment conclusion

While lingering tariff uncertainty and worries about the US fiscal outlook remain at the forefront of investors’ minds, there are several reasons for optimism – including a slow but gradual recovery in Chinese economic activity and a revitalised EU growth outlook.

While a number of policies implemented in the first half of this year have weighed on US growth, such as immigration enforcement, spending cuts and notably tariffs, we remain of the view that a well-diversified portfolio, with exposure to a mix of cyclical and defensive assets (and the right amount of tactical tilts), can help investors to protect and grow their wealth over the longer term. The difficulty, of course, is being able to extract signals from the abundance of market noise and sticking to the process.