Growing concerns over large US fiscal deficits, alongside consumers’ inflation expectations and the escalating conflict in the Middle East, have been closely monitored by the markets. Fiscal sustainability issues have been further exacerbated by President Trump’s Big Beautiful Bill, renewed interest in fiscal expansion in Europe, and Japanese debt auctions. As a result, long-end bond yields have risen, while equities have demonstrated some resilience.
Looking ahead, we remain marginally positive on risk assets, with increased valuation discipline. The growth-inflation mix poses less of a headwind, and we do not anticipate a corporate earnings recession. However, fiscal risks and the potential economic impact of uncertainties surrounding tariffs and geopolitical conflicts suggest rising volatility.
From an economic perspective, we highlight the following key themes:
- Economic activity in the US is expected to decelerate, with growth projections for this year remaining unchanged at 1.6%.
- The impact of US tariffs on underlying inflation is expected to be gradual.
- International trade negotiations are likely to become increasingly challenging.
- We have upgraded growth projections for some emerging markets, including Brazil (2025), Mexico (2025), and India (2025 and 2026). In China, we would like to see a more sustained positive trend before upgrading our growth expectations.
Monica Defend
The traditional safe haven stature of the USD will be challenged in an era of rising deficit and debt.
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Date of first use: 2 July 2025
Doc ID: 4285688