Global economies send mixed signals as tariff challenges remain

New market commentary from investment manager, T. Rowe Price, has identified the conflicting macroeconomic trends driving its “balanced” approach to risk assets, as fiscal stimulus and monetary policy easing contends with moderating economic growth and ongoing inflationary pressures.

The overall sentiment in the firm’s global asset allocation view, collated by its investment team led by Thomas Poullaouec, Head of Multi-Asset Solutions APAC, confirms tariff and trade-induced uncertainty is still running rampant in global economies outside the U.S.

This comes despite both Australia and the U.S. give off “mixed signals” driven by monetary policy easing and heightened fiscal spending at the same time as activity moderates.

“Following Chairman Powell’s Jackson Hole speech, markets have nearly fully priced in a 25 basis point rate cut this month, with Powell adopting a more balanced tone and acknowledging potential labor market weakness,” the paper said.

“This shift echoes last year’s pivot when the Fed moved to prioritise the labor market as inflation neared its target. The bond market, however, saw the moves as premature, pushing Treasury yields nearly 100 basis points higher as the Fed lowered short-term rates by the same amount.

“Today, with additional fiscal stimulus on the horizon, elevated Treasury issuance, and tariffs continuing to threaten inflation, the bond market may once again deem the timing too soon and inflationary, sending yields higher. With longer-dated Treasury yields already under upward pressure, any perceived misstep by the Fed could prove costly, as they try to strike a precarious balance between stabilising the labor market without stoking inflation.”

According to the commentary, equity markets are contending with strong activity at the same time as valuation concerns, as concerns grow over the risks posed to this environment supported by monetary and fiscal policy.

“With equity markets trending near record levels and valuations becoming stretched once again, concerns about narrow leadership and reliance—particularly in the U.S.—on A.I. spending are a growing concern.

“Markets have priced in a high degree of certainty that the pace of AI spending will continue and that those companies that are investing heavily in AI technology will see a significant payoff. It is unquestionable that AI technology will be transformative to many industries and lead to greater efficiencies over the long-term.

“The risk for investors today, however, is that the AI theme is the primary driver of the market and economic growth, with other areas of the economy still pressured by high interest rates, uncertainty around tariffs, and the job market. With the market so narrowly focused on every data point surrounding AI spending and AI company related earnings outlooks, the risk of disappointment is high.

“Delivering perfection has almost become a requirement rather than a goal.”

The investment manager also confirmed its outlook on equities, bonds and cash.

“We maintain a neutral stance on equities balancing solid fundamentals, ongoing fiscal support and a broadly constructive earnings backdrop against stretched valuations and lingering trade uncertainty. Within regions, we continue to find more attractive opportunities outside the U.S., particularly in value, driven by more compelling valuations and improving sentiment, which are supported by fiscal spending tailwinds and accommodative central bank policies.

“We increased our underweight position to global bonds given potential for upward pressure on U.S. interest rates from increased supply to accommodate U.S. fiscal policy and inflationary risk posed by tariffs. We added to our overweight to credit sectors given its income advantage in a potentially sideways market as fundamentals remain broadly supportive and default risk remains low even in a slower economic environment. We keep some inflation sensitivity through short-term TIPS as risks are on the upside.

“RBA easing bias is a headwind for cash returns.”