Be cautious about the US economic outlook

One obvious reason is that asset prices in many markets appear ‘priced to perfection,’ as the saying goes. In other words, only good news is priced in, and asset prices may be somewhat stretched and vulnerable as a result. Equities have soared, credit spreads are very narrow, the US dollar has been weak, and emerging market assets have been particularly strong. Extended valuation is not a reason on its own for asset prices to correct, but we do sense there is vulnerability if the rather supportive assumptions that investors are making about the economic and financial market outlook are wrong.

One area of concern is the absence of data in the US due to the shutdown. The absence of inflation data could prove detrimental to asset prices, particularly bonds. The Bureau of Labor Statistics (BLS) in the US has said that CPI data will be released on October 24^th but this will be based on very truncated survey data, increasing the risk of misrepresentation. The market is already sold on the idea of two more 25-bps Fed rate cuts this year, with more to follow in 2026, and hence could be at risk if these assumptions are bought into question. Worse still, any nasty upside inflation surprises would immediately re-focus attention on the alleged politicisation of the Fed by the Administration. We clearly cannot say for certain that inflation will overshoot expectations but instead merely point out that the market will likely prove very vulnerable if it does.

A second, related concern that we have is the surge in non-fiat asset prices like gold, silver and even crypto. If this is part of a so-called ‘debasement trade’ then why isn’t the primary victim of that trade – the bond market - under pressure? Now it may be that these non-fiat assets have surged for reasons other than those to do with government debt and monetisation fears; but it is difficult to know what these could be. If the surge is part of a debasement trade, it suggests that either the rise in non-fiat assets like gold is wrong, or the stability in government bonds is mistaken.

If it proves to be the case that the bond market is too complacent about the inflation risk, then the adverse reverberations for other assets could be very substantial and, of course, we have had fair warning of this given how the tanking of the treasury market in April forced President Trump to suspend tariffs for 90-days.

Another cause for concern is, perhaps strangely enough, the relatively modest amount of inflation that we’ve seen in the US following the introduction of tariffs. One concern, as mentioned earlier is that this rise in inflation could still come in time but another worry, for the more immediate future, is that relatively benign inflation reflects the fact that firms have absorbed a large chunk of the tariff cost.

Steven Barrow, Head of Standard Bank G10 Strategy, said data on tax revenues paid by firms would seem to suggest this with payments to the treasury down around 10% so far this year in spite of the uplift from tariffs (the chart is on page 4). With the Q3 earnings season just ahead, it could mean that the ‘priced to perfection’ stock market finds out that things are not quite so perfect.

“We could go on with other potential warning signs, like political strains in France and Japan, and more. But at this stage we need to ask, what should be done? Is it a time to merely be watchful, or are we at a point where a material amount of risk needs to be taken off the table? Right now, we’d err more towards the former. US inflation is the dog that has not barked so far and, if it does not bark then asset prices could become even more perfectly priced. But being watchful means being prepared and, in our view that means being ready for a weaker bond market, weaker asset prices, wider spreads and a firmer US dollar”, said Steven Barrow.