Podcast Contributor: Michael Zezas

Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.

Michael Gapen: And I'm Michael Gapen, Chief U.S. Economist.

Michael Zezas: Today  ongoing effects of tariffs on the U.S. economy.

It is Friday, August 1st at 8am in New York.

So, Michael, lots of news over the past couple of weeks about the U.S. making trade agreements with other countries. It's certainly dominated client conversations we've had, as I'm assuming it's probably dominated conversations for you as well.

Michael Gapen: Yeah  certainly a topic that never goes away. It keeps on giving at this point in time. And I guess, Michael, what I would ask you is,  what do you make of the recent deals ? Does it reduce uncertainty in your mind? Does it leave uncertainty elevated?

What’s  your short-term outlook  for trade policy?

Michael Zezas: Yeah, I think it's fair to say that we've reduced the range of potential outcomes in the near term around tariff rates. But we haven't done anything to reduce longer term uncertainties in U.S. trade policy.

So, consider, for example, over the last couple of weeks, we have an agreement with Japan and an agreement with Europe – two pretty substantial trading partners – where it appears, the tariff rate that's going to be applied is something like 15 percent. And when you stack up these deals on one another, it looks like we're going to end up in an average effective tariff rate from the U.S. range of kind of 15 to 20 percent. And if you think back a couple of months, that range was much wider and we were potentially talking about levels in the 25 to 30 percent range.

So, in that sense, investors might have a bit of a respite from the idea of kind of massive uncertainty around trade policy outcomes. However, longer term, these agreements really just are kind of principles that are set out for behavior, and there's lots of trip wires that could create future potential escalations.

So, for example, with the Europe deal, part of the deal is that Europe will commit to purchase a substantial amount of U.S. energy. There's obvious questions as to whether or not the U.S. can actually supply that amidst its own energy needs that are rising substantially over the course of the next year. So, could we end up in a situation where six months to a year from now if those purchases haven't been made – the U.S. sort of presses forward and the administration threatens to re-escalate tariffs again. Really hard to know, but the point is these arrangements have lots of contingencies and other factors that could lead to re-escalation. 

But it's fair to say, at least in the near term, that we're in a landing place that appears to be somewhat smaller in terms of the range of potential outcomes.  Now, I think a question for investors is going to be – how do we assess what the effects of that have been, right? Because is it fair to say that the economic data that we've received so far maybe isn't fully telling the story of the effects that are being felt quite yet.

Michael Gapen: Yeah, I think that's completely right. We've always had the view that it would take several months or more just for tariffs to show up in inflation. And if tariffs primarily act as a tax on the consumer, you have to apply that tax first before economic activity would  moderate.

So, we've long been forecasting that inflation would begin to pick up in June. We saw a little of that. But it would accelerate through the third quarter, kind of peaking around the August-September period. So, I'd say we've seen the first signs of that, Michael, but we need obviously follow through evidence that it's happening. So,  we do expect that in the July, August and September inflation reports, you'll see a lot more evidence of tariffs pushing goods prices higher.

So,  we'll be dissecting all the details of the CPI looking for evidence of direct effects of tariffs, primarily on goods prices, but also some services prices. So, I'd put that down as tthe first marker, and we've seen some,  early evidence on that.

The second then, obviously, is the economy's 70 percent consumption. Tariffs act as a regressive tax on low- and middle-income consumers because non-discretionary purchases are a larger portion  of their consumption bundle and a lot of goods prices are as well. Upper income households tend to spend relatively more money  on leisure and recreation services. So, we would then expect growth in private consumption, primarily led by lower and middle-income spending softening. We think the consumer would slow down. But into the end of the year.Those are the two main markers that I would point to.

Michael Zezas: Got it. So, I, I think this is really important because there's certainly this narrative amongst clients that we talk to that markets may have already moved on from this.  Or investors may have already priced in the effects – or lack thereof – of some of this tariff escalation. Now we're about to get some real evidence from economic data as to whether or not that view and those assumptions are credible.

Michael Gapen: That's right.  Where we were initially on April 2nd after Liberation Day was largely embargo level tariffs. And if those stayed in place, trade volumes and activity and financial market asset values would've collapsed precipitously. And they were for a few weeks, as you know, but then we dialed it back and got out of thatSo, yeah, , we would say it's wrong to conclude that the economy , has absorbed these tariffs already and that they won't have,, a negative effect on economic activity. We think they will just in the base case where tariffs are high, but not too high, it just takes a while for that to happen.

Michael Zezas:  And of course, all of that's kind of core to our multi-asset outlook right now where a slowing economy, even with higher recession probabilities can still support risk assets. But of course, that piece of it is going to be very complicated if the economic data ends up being worse than you suspect.

Now, any evidence you've seen so far? For example, we had a GDP report earlier this week. Any evidence from that data as to where things might go over the next few months?

Michael Gapen: Yeah, well, another data point on trade policy and trade policy uncertainty really causing a lot of volatility in trade flows.

So, if you recall, there's big front running of tariffs in the first quarter. Imports were up about 37 percent on the quarter; that ended in the second quarter, imports were down 30 percent. So net trade was a big drag on growth in the first quarter. It was a big boost to growth in the second. But we think that's largely noise. So, what I would say is we've probably level set import and export volumes now.

 So, do trade volumes from here begin to slow? That's an unresolved question. But certainly, the large volatility in the trade and inventory data in Q1 and Q2 GDP numbers are reflective of everything that you're saying about the risks around trade policy and elevated trade policy uncertainty.

Second, though, I would say, because we started out the quarter with Liberation Day tariffs, the business sector, clearly – in our mind anyway – clearly responded by delaying activity. Equipment spending was only up 4 to 5 percent on the quarter. IP was up about 6 percent. Structures was down 10 percent. So, for all the narrative around AI-related spending, there wasn't a whole lot of spending on data centers and power generation in the second quarter.

So, what you speak to about the need to reduce some trade policy uncertainty, but also your long run trade policy uncertainty remains elevated? I would say we saw evidence in the second quarter that all of that slowed down capital spending activity. Let's see if the One Big Beautiful Bill act can be a catalyst on that front, whether animal spirits can come back. But that's the other thing I would point to is that,  business spending was weak and even though the headline GDP number was 3 percent, that's mainly a trade volatility number. Final sales to domestic purchasers, which includes consumption and business spending, was only up 1.1 percent in the quarter.

So, the economy's moderating; things are cooling. I think trade policy and trade policy uncertainty is a big part of that story.

Michael Zezas: Got it. So maybe this is something of a handoff here  where my team had been really, really focused and investors have been really, really focused on the decision-making process of the U.S. administration around tariffs. And now your team's going to lead us through understanding the actual impacts. And the headline numbers around economic data are important, but probably even more important is the underlying. Is that fair?

Michael Gapen: I think that's fair. I think as we move into the third quarter, like between now and when the Fed meets in, September, again, they'll have a few more inflation reports, a few more employment reports. We're going to learn a lot more than about what the Fed might do. So, I think the activity data and the Fed will now become much more important over the next several months than where we've been the past several months, which is about, has been about announcements around  trade.

Michael Zezas: All right. Well then, we look forward to hearing more from you and your team in the coming months. Well Michael, thanks for taking the time to talk to me.

Michael Gapen: Thanks for having me on.

Michael Zezas: And to our audience, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review and tell your friends about the podcast. We want everyone to listen. 

Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.

Ariana Salvatore: And I'm Ariana Salvatore, U.S. Public Policy Strategist.

Michael Zezas: Today we're diving into the administration's newly released AI action plan. What's in It, what it means for markets, and where the challenges to implementation might lie.

It's Thursday, July 24th at 10am in New York.

Things are not all quiet on the policy front, but with the fiscal bill having passed Congress and trade tensions simmering ahead of the new August 1st deadline, clients are asking what the administration might focus on that investors might need to know more about.

Well, this week it seems to be AI.

The White House just unveiled its sweeping AI Action Plan, the first big policy-signaling document since the administration canceled the implementation of former President Biden's AI Diffusion Rule. So, Ariana, what do we need to focus on here?

Ariana Salvatore: This document is basically the administration signaling how it intends to cement America's role in the global development of AI – through a mix of both domestic and global policy initiatives. There are over 90 policy actions outlined in the document across three main pillars: innovation, infrastructure, and global leadership.

Michael Zezas: That's right. And even though there's still some important details to flesh out here in terms of what these initiatives might practically mean, it's worth delving into what the different areas are outlining and what it might mean for investors here.

Ariana Salvatore: So first on the innovation front. The plan calls for removing regulatory barriers to AI development, encouraging open-source models, and investing in interpretability and robustness. There's also a push throughout the document to build world class data sets and accelerate AI adoption across the federal agencies.

Michael Zezas: Infrastructure is another main pillar here, and keeping with the theme of loosening regulation, the plan includes fast tracking permits for data centers, expanding access to federal land, and improving grid interconnection for power generation. There's also a call to stabilize the existing grid and prioritize dispatchable energy sources like nuclear and geothermal.

But that's where we may see some of these frictions emerge. As our colleague Stephen Byrd has talked about quite a bit, the grid remains a major constraint for power generation; and even with some of these executive orders, the President's ability to control scaling power capacity is somewhat limited.

Many of these policy tools to increase energy production to facilitate more data centers will likely have to be addressed by Congress, especially if any of these policy changes are to be more durable.

Ariana Salvatore: One area where the executive actually does have pretty broad discretion to control is trade policy, and this document focused a lot on the U.S.’ role in the world as we see increasing AI competition on a global scale.

So, to that point, the third pillar is around global leadership. Specifically, the plan calls for the U.S. to export its full AI stack – hardware, models, standards – to allies, while simultaneously tightening export controls on rivals. China's clearly a focal point here, and that's one that is explicitly called out in the document.

Michael Zezas: Right. And so, it all seems part of a proposal to form in International AI Alliance built on shared values and open trade; and the plan explicitly frames AI leadership as a strategic priority in the multipolar world.

It calls for embedding U.S. AI standards and global governance bodies while using export controls and diplomatic tools to limit adversarial influence. But you know, importantly, something we'll have to track here is what exactly are these standards going to be and how that will shape how industry in the U.S. around AI has to behave. Those details are not yet forthcoming.

So, there's a couple of threads here across all of this; deregulation, pushing for more energy generation, trade policy aspects. Ariana, what do you think it all means for investors? Are there key sectors here that face more constraints or face more tailwinds that investors need to know about?

Ariana Salvatore: Yeah, so really two key takeaways from this document. First of all, AI policy is a priority for the administration, and we're seeing them pursue efforts to reduce regulatory barriers to data center construction. Although those could run into some legal and administrative hurdles. All else equal reduction in data center, build time and cost benefits owners of natural gas fired and nuclear power plants. So, you should see a tailwind to the power and utility sector.

Secondly, this document and the messaging from the President makes AI a national security issue. That's why we see differentiated treatment for China versus the rest of the world, which is also reflected in the administration's approach to the broader trade relationship and dovetails well with our expectation for higher tariffs on China at the end of this year versus the global baseline.

Michael Zezas: Right. So, if AI becomes a national and economic security issue, which is what this document is signaling, it's one of the reasons you should expect that these tariff increases globally – but with a skew towards China – are probably durable. And it's something that we think is reflected in the sector preferences or equity strategy team, for example, with some caution around the consumer sector.

Ariana Salvatore: That's right. So, plan to watch as this unfolds.

Michael Zezas: That's it for today's episode of Thoughts on the Market. If you enjoy the show, please leave us a review and share Thoughts on the Market with a friend or colleague today.

Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.

Today: Why there's no summer slowdown yet for U.S. policy catalysts for the financial markets.

It's Friday, July 18th at 8am in New York.

The past week and a half has seen many major policy, events and headlines relevant to the outlook for financial markets. This includes more speculation by the U.S. administration over leadership at the Fed, more information about the deficit impact of the new fiscal bill, and – perhaps most tangibly – announcements of new tariffs that, if they take effect, will be a meaningful step up from already elevated levels.

It would all suggest a weaker growth outlook and less overseas demand for U.S. assets. Yet major financial markets seem to have shrugged it all off. The S & P and the U.S. dollar are up about 1 percent over that time, and Treasury yields are modestly higher.

So, what's going on? Two possibilities to consider, and it implies investors should pay more attention than they may be inclined to this summer.

First, when it comes to the impact of tariffs on the economy, it's possible we're dealing with a delayed impact. The effective average U.S. tariff rate shot up from 3 to 4 percent earlier this year to 13 percent, and if recent announcements go through, that could exceed 20 percent. That's a major escalation in costs for U.S. companies and consumers and something our economists argue takes growth down to 1 percent and elevates the possibility of a recession.

But our economists also point out that we may not be experiencing these cost increases quite yet. History suggests several months of lag between implementation and economic impact as companies leverage existing lower cost inventory before making tough decisions on pricing and managing their own costs.

That means hard economic data likely does not yet tell us about the impact or lack thereof of tariffs, but that may change in the coming months.

Second. It's also possible that the recent announcements of tariff increases don't tell us the whole story. As my colleagues in our equity strategy team point out, corporate America's cost base is most sensitive to the U.S.' largest trading partners – China, Mexico, Canada, and Europe. As we've discussed in prior episodes, we see tariff rate increases as likely on all these trading partners as tough negotiations continue.

However, the details will matter greatly if rates are increased, but with a healthy dose of exceptions or quotas. Even if they diminish over time, then the real impact could be significantly blunted. In that case, markets would resume taking cues from other factors such as earnings revisions and forward-looking expectations around AI driven productivity.

So bottom line, market movements suggest investors are assuming benign U.S. policy outcomes. But there's plenty of developments to track in the coming weeks and months to test if those assumptions will hold. Trade policy details and hard economic data are key among them.

Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review, and tell your friends about the podcast. We want everyone to listen.

Welcome to Thoughts on the Market. I’m Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.  Today: The latest on U.S. tariffs and their market impact.

It’s Thursday, July 10th at 12:30pm in New York.

It's been a newsy week for U.S. trade policy, with tariff increases announced across many nations. Here’s what we think investors need to know.

First, we think the U.S. is in a period of tactical escalation for tariff policy; where tariffs rise as the U.S. explores its negotiating space, but levels remain in a range below what many investors feared earlier this year. We started this week expecting a slight increase in U.S. tariffs—nothing too dramatic, maybe from 13 percent to around 15 percent driven by hikes in places like Vietnam and Japan. But what we got was a bit more substantial.

The U.S. announced several tariff hikes, set to take effect later, allowing time for negotiations. If these new measures go through, tariffs could reach 15 to 20 percent, significantly higher than at the beginning of the year, though far below the 25 to 30 percent levels that appeared possible back in April. It’s a good reminder that U.S. trade policy remains a moving target because the U.S. administration is still focused on reducing goods trade deficits and may not yet perceive there to be substantial political and economic risk of tariff escalation. Per our economists’ recent work on the lagged effects of tariffs, this reckoning could be months away.

Second, the implications of this tactical escalation are consistent with our current crossasset views. The higher tariffs announced on a variety of geographies, and products like copper, put further pressure on the U.S. growth story, even if they don’t tip the U.S. into recession, per the work done by our economists. That growth pressure is consistent with our views that both government and corporate bond yields will move lower, driving solid returns.  It's also insufficient pressure to get in the way of an equity market rally, in the view of our U.S. equity strategy team. The fiscal package that just passed Congress might not be a major boon to the economy overall, but it does help margins for large cap companies, who by the way are more exposed to tariffs through China, Canada, Mexico, and the EU – rather than the countries on whom tariff increases were announced this week

Finally, How could we be wrong?  Well, pay attention to negotiations with those geographies we just mentioned:  Mexico, Canada, Europe, and China.  These are much bigger trading partners not just for U.S. companies, but the U.S. overall.  So meaningful escalation here can drive both top line and bottom line effects that could challenge equities and credit.  In our view, tariffs with these partners are likely to land near current levels, but the path to get there could be volatile. 

For the U.S., Mexico and Canada, background reporting suggests there’s mutual interest in maintaining a low tariff bloc, including exceptions for the product-specific tariffs that the U.S. is imposing.  But there are sticking points around harmonizing trade policy. The dynamic is similar with China.  Tariffs are already steep—among the highest anywhere. While a recent narrow deal—around semiconductors for rare earths—led to a temporary reduction from triple-digit levels, the two sides remain far apart on fundamental issues. 

So when it comes to negotiations with the U.S.’ biggest trading partners, there’s sticking points. And where there’s sticking points there’s potential for escalation that we’ll need to be vigilant in monitoring.

Thanks for listening. If you enjoy Thoughts on the Market please leave us a review. And tell your friends about the podcast. We want everyone to listen.

Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, global Head of Fixed Income Research and Public Policy Strategy.

Ariana Salvatore: And I'm Ariana Salvatore, US Public Policy Strategist.

Michael Zezas: Today we're talking about the outlook for US trade policy. It's Wednesday, July 2nd at 10:00 AM in New York.

We have a big week ahead as next Wednesday marks the expiration of the 90 day pause on reciprocal tariffs. Ariana, what's the setup?

Ariana Salvatore: So this is a really key inflection point. That pause that you mentioned was initiated back on April 9th, and unless it's extended, we could see a reposition of tariffs on several of our major trading partners. Our base case is that the administration, broadly speaking, tries to kick the can down the road, meaning that it extends the pause for most countries, though the reality might be closer to a few countries seeing their rates go up while others announce bilateral framework deals between now and next week.

But before we get into the key assumptions underlying our base case. Let's talk about the bigger picture. Michael, what do we think the administration is actually trying to accomplish here?

Michael Zezas: So when it comes to defining their objectives, we think multiple things can be true at the same time. So the administration's talked about the virtue of tariffs as a negotiating tactic. They've also floated the idea of a tiered framework for global trading partners. Think of it as a ranking system based on trade deficits, non tariff barriers, VAT levels, and any other characteristics that they think are important for the bilateral trade relationship. A lot of this is similar to the rhetoric we saw ahead of the April 2nd "Liberation Day" tariffs.

Ariana Salvatore: Right, and around that time we started hearing about the potential, at least for bilateral trade deals, but have we seen any real progress in that area?

Michael Zezas: Not much, at least not publicly, aside from the UK framework agreement. And here's an important detail, three of our four largest trading partners aren't even scoped for higher rates next week. Mexico and Canada were never subject to the reciprocal tariffs. And China's on a separate track with this Geneva framework that doesn't expire until August 12th. So we're not expecting a sweeping overhaul by Wednesday.

Ariana Salvatore: Got it. So what are the scenarios that we're watching?

Michael Zezas: So there's roughly three that we're looking at and let me break them down here.

So our base case is that the administration extends the current pause, citing progress in bilateral talks, and maybe there's a few exceptions along the way in either direction, some higher and some lower. This broadly resets the countdown clock, but keeps the current tariff structure intact: 10% baseline for most trading partners, though some potentially higher if negotiations don't progress in the next week. That outcome would be most in line, we think, with the current messaging coming out of the administration.

There's also a more aggressive path if there's no visible progress. For example, the administration could reimpose tariffs with staggered implementation dates. The EU might face a tougher stance due to the complexity of that relationship and Vietnam could see delayed threats as a negotiating tactic. A strong macro backdrop, resilient data for markets that could all give the administration cover to go this route.

But there's also a more constructive outcome. The administration can announce regional or bilateral frameworks, not necessarily full trade deals, but enough to remove the near term threat of higher tariffs, reducing uncertainty, though maybe not to pre-2024 levels.

Ariana Salvatore: So wide bands of uncertainty, and it sounds like the more constructive outcome is quite similar to our base case, which is what we have in place right now. But translating that more aggressive path into what that means for the economy, we think it would reinforce our house view that the risks here are skewed to the downside.

Our economists estimate that tariffs begin to impact inflation about four months after implementation with the growth effects lagging by about eight months. That sets us up for weak but not quite recessionary growth. We're talking 1% GDP on an annual basis in 2025 and 2026, and the tariff passed through to prices and inflation data probably starting in August.

Michael Zezas: So bottom line, watch carefully on Wednesday and be vigilant for changes to the status quo on tariff levels. There's a lot of optionality in how this plays out, as trade policy uncertainty in the aggregate is still high. Ariana, thanks for taking the time to talk.

Ariana Salvatore: Great speaking with you, Michael.

Michael Zezas: And if you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.