Pulais: The tariff effect will continue to push up U.S. inflation in the second half of the year, becoming a dominant force in the market
Prysm pointed out that despite the rising optimism in the market regarding the economic outlook, high tariffs will continue to push up inflation in the United States, becoming a dominant force in the market. Small businesses will be affected, and the inflation outlook faces multiple pressures. Although the unemployment rate is unlikely to rise significantly, the labor market's buffering capacity is weak. Prysm expects that a recession is unlikely to occur, but inflation risks still exist, and inflation-resistant assets may benefit. The Federal Reserve may cut interest rates this year, but inflation pressures could limit the extent of the rate cuts
According to the Zhitong Finance APP, Pruis stated that as of the end of June, the market generally believes that the economic outlook has completely shaken off concerns about tariffs potentially dragging the U.S. economy into recession, shifting focus to whether the economy can achieve a soft landing. However, this idea is overly optimistic and overlooks the unprecedented high tariffs that will have a negative impact on the economy, with small businesses being the first to bear the brunt and putting upward pressure on inflation. In addition, multiple factors such as tariffs and a weak dollar (upward inflation pressure) and potential demand slowdown (easing inflation pressure) are impacting the inflation outlook. However, Pruis expects that despite a slowdown in service sector inflation, the effects of tariffs will still push inflation higher in the second half of this year, becoming a dominant force in the market.
Arif Husain, Global Head of Fixed Income and Chief Investment Officer at Pruis, stated that while the unemployment rate is unlikely to rise significantly, the labor market's ability to buffer against economic recession is weaker than at any time after the pandemic. Currently, the number of job vacancies per unemployed person is far lower than in 2021 and 2022, indicating that economic growth may actually be more uncertain. However, given the current economic data and the potential boosting effect of fiscal spending, a recession seems unlikely.
Arif Husain pointed out that the U.S. fiscal plan will increase market concerns about inflation. Tariffs (which are detrimental to growth) and fiscal policy (which is beneficial to growth) are pulling against each other in terms of economic growth, but both will raise inflation risks. Currently, allocating anti-inflation assets (such as U.S. Treasury Inflation-Protected Securities (TIPS)) seems relatively cheap, and if market conditions reverse and concerns about worsening inflation arise, anti-inflation assets will benefit.
The economic forecast released by the Federal Reserve after the June meeting shows that policymakers still expect a median rate cut of 50 basis points this year. Although Pruis believes that there may still be two rate cuts this year, each by 25 basis points, inflation pressures make a single rate cut more likely. Considering the lessons learned by the Federal Reserve in 2021 and 2022 due to soaring inflation, it is even possible that they may stop cutting rates this year, which may disappoint investors hoping that Fed rate cuts will boost U.S. Treasury prices
