A Federal Open Market Committee policymaker indicated a potential single quarter point (25 basis points) rate cut later this year. Business officials feel more confident in managing tariffs, though they anticipate inevitable price increases.

The labour market continues robust, with consumer consumption maintaining strength. Nonetheless, inflation risks loom as businesses run out of ways to delay tariff-related price hikes.

Economic Growth And Inflation Outlook

Economic growth is forecasted to decelerate to 1.1% this year, while inflation is expected to rise to 2.9%. Consistent with past statements, Bostic has supported just one rate cut for this year.

Given current commentary from the policymaker, it’s now effectively clear that only one modest reduction in rates—just a quarter percentage point—is on the table for the remainder of the year. What this implies is that we likely won’t see a broad loosening of monetary conditions, which tends to limit any overly optimistic repricing across futures or options contracts referencing benchmark rates. Bostic’s consistent view aligns with that outlook, so there’s little room for reinterpretation. If anything, it narrows our scenario planning.

Meanwhile, sentiment among firms tied to import-heavy operations reflects improved practical handling of tariffs. They’ve adapted operationally to some extent, though they now admit that cost padding is approaching its limit. In plain terms, the price buffer is almost exhausted. It’s coming to a point where the increased costs will start to show up in final goods and services. Previously, margin adjustments and supply restructuring masked some of the burden, but those tools are running thin.

From our macro read, the labour market is not just ticking along—it remains firm, which helps keep household spending intact. This continued momentum in spending supports GDP components related to personal consumption. However, where things get tricky is inflation. Although the economy is not overheating, rising input costs and narrowing firm-level flexibility mean that pricing pressures are gently building. They’re not surging, but they’re not contained either.

Market Implications And Positioning

We’re anticipating official growth to temper this year, pulling back to a projected 1.1%. That’s not recessionary, but it marks a noticeable step down from recent periods. At the same time, inflation is pushing up to an expected 2.9%, subtly above the general comfort zone. That spread between slowing real output and firming prices increases the odds of some market dislocation, particularly in the breakeven curves and short-rate hedging instruments.

In these kinds of moments, the yield curve doesn’t necessarily steepen—it can flatten or even twist, depending on forward guidance and realised inflation data. There’s a tendency for some traders to assume that any inflation uptick would force earlier rate hikes, but that’s not today’s story. Instead, we’re seeing delay-driven inflation from supply side factors, rather than the overheating kind that sparks immediate tightening.

Using this data set, we’re reducing our assumption for upside volatility in policy-sensitive instruments. What we’re watching instead is how short-dated vol pricing adjusts as risk sentiment fluctuates. It’s also worth observing strike skew in rates options over the next few cycles. Hedging demand may shift to reflect downward growth revisions, even if short-term inflation data bumps around.

Cumulative positioning likely needs to adjust further. Weekly flow data suggests that some portfolios remain slightly overhedged for rate drops that now seem less likely to materialise. The policy path is not as ambiguous, and at this stage, positioning needs to match what’s been directly communicated.

With implied growth softening and inflation staying comparatively firm, we’re entering an environment where relative value trades between breakevens and real yields may offer more signal than nominal rate direction alone. That tends to be where markets express medium-term policy mispricing most cleanly.

As inflation symmetry breaks a little, but real activity slows down, any levered bets on repeated rate cuts are probably overstretched. We lean towards calibrated exposure using tools that allow convexity, but not exaggerated delta risk. The tape is giving a firmer read on restraint than on optimism.

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