Here’s the key takeaway from today’s Morning Brief, which you can subscribe to receive directly in your inbox every morning along with:
The stock market is hovering near all-time highs, yet the sentiment feels off.
The sell-off last week produced a long list of potential triggers, including disappointing manufacturing data, rising inflation expectations, and, naturally, the effects of tariffs on consumers and the wider economy.
However, Neil Dutta, head of economics at Renaissance Macro, believes that the discourse around the last factor simply obscures what the first two imply: The US economy is experiencing a slowdown.
In a Monday email, Dutta highlighted four troubling trends for the economy that stand in stark contrast to what positioned him as a prominent advocate for a “no landing” scenario back in 2022.
Consumer spending is weakening as income growth declines, housing markets are sluggish, government expenditure is tapering off, and Wall Street anticipates that the US economy will continue to grow at about 2.5%, consistent with the previous three years.
“If 2023 was characterized by pleasant surprises, there is a heightened risk of unpleasant surprises in 2025,” Dutta commented.
“Much of what we read in the financial media — tariffs and uncertainty — are distractions, serving as a retrospective justification for an economic slowdown that was already underway.”
Late last month, Fed Chair Jay Powell remarked that the US economy was in “quite a good place” while explaining the Fed’s decision to hold off on rate cuts. This claim also clarifies why Powell seemed relaxed about market expectations scaling back their predictions for additional cuts.
When questioned about the economic impact of tariffs, Powell noted that “significant” changes related to tariffs, immigration policies, fiscal policies, and regulations each introduced “extra uncertainty” into the economic outlook.
Nonetheless, the Fed Chair appeared generally unfazed.
From Dutta’s perspective, the Fed’s deceleration in rate cuts has resulted in a “passive tightening of monetary policy [that] poses the primary risk with significant ramifications for financial market investors.”
In other terms, by halting rate cuts during a decelerating economy, the Fed is, in effect, elevating rates.
Looking ahead, Dutta anticipates that long-term rates and stock prices will decrease as rate cuts and an economic slowdown are integrated, along with further cooling in the job market.
Whether it’s tariffs, an overheated AI sector, or various other pockets of exuberance in the stock market, the current market landscape is laden with potential risks in the coming months.
