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The "Big Beautiful Bill, " aims to make Trump's 2017 tax cuts permanent and introduce additional pro-growth reforms, but faces criticism for potentially increasing the US deficit. Of late, we have seen these fiscal concerns reflected in the spike in long-dated US Treasury rates. Elon Musk's denouncement of the bill and his escalating public feud with President Trump, including threats to cancel federal contracts with Musk's companies, add complexity to the US economic landscape. Coupled with the criticism leveled against the accuracy of Musk’s savings estimates in his Department of Government Efficiency (DOGE) project, faith in the US administration is certainly being put through further tests.
Investment sentiment continues to shift away from the US. Moody’s downgrade of the US credit rating to AA1 from AAA places the US firmly in AA+ territory. While we don’t expect outsized market panic, the narrative of a weaker US outlook has gained momentum, reflected through higher long-end Treasury yields and a weaker US dollar. The US is attempting damage control by softening some of its hard stances, such as those against China, since April. The sell-off in longer-dated Treasury bonds during risk-off conditions reflects declining confidence in US risk as the trade war continues.
Our team started the year expecting stable inflation and negative growth impacts from tariffs. We anticipated the trade war would harm global growth more than inflation. As the effects of Trump's stringent Liberation Day announcements unfold, our views remain unchanged. Corporates have suspended hiring and investment plans, and job cuts are increasing due to lower growth forecasts.
Tariffs might cause a temporary spike in inflation, but the pass-through of price increases is unlikely to be sustainable. If corporations pass higher prices onto consumers, it would likely reduce demand, given how recent price hikes have eroded consumer savings. Low energy prices are expected to counterbalance any inflationary impact from tariffs. So far, inflation has remained calm, with overall inflation either stable or trending downwards. As of May, year-over-year headline inflation stood at 2.4%, down from 3.0% in January. Similarly, core inflation remains almost level with previous months, tracking at 2.8% year-over-year*.
The Fed’s wait-and-see posture has kept US Treasury yields elevated. We believe the recent rise in Treasury yields will be short-lived. As US economic fundamentals deteriorate, the Fed will need to cut rates aggressively. The longer the Federal Reserve waits, the larger the rate cuts will need to be eventually.
*Footnote: Blomberg, as of 11 June 2025.
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