Q3 Macro Outlook: Less Chaos, More Clarity

In the upcoming quarter, the economic landscape is expected to stabilize following the tumultuous events of Q2, particularly those surrounding the policies of the Trump administration. The article outlines key issues that will shape market sentiment and economic performance in Q3.

Key Issues Ahead

• US-China Relations: The ongoing trade dynamics between the US and China remain critical. China’s control over rare earth metals gives it significant leverage, especially as the US seeks to diversify its supply chains. The US, in turn, holds leverage in specific sectors like aerospace.
• US Tariff Policies: President Trump is expected to announce new tariffs targeting countries perceived as negotiating in bad faith. The outcome of trade negotiations with Japan and Europe will be closely monitored.
• Geopolitical Tensions: The conflict between Iran and Israel could escalate, impacting oil markets and inflation. Central banks may adopt a dovish stance despite potential energy price spikes.
• Recession Risks: The article warns of rising recession risks in the second half of the year, driven by post-tariff slowdowns and high policy rates from the Federal Reserve.

Market Predictions

The outlook suggests a weak US dollar and strong performance in precious metals, driven by geopolitical risks and investment demand. The commodities sector is expected to continue its robust performance, with gold leading the charge.

Equities Outlook

US equities may face underperformance relative to global peers as the market adjusts to a rebalancing away from US exceptionalism. However, aggressive rate cuts by the Fed could lead to a short-term rally in equities.

Conclusion

The article emphasizes the importance of monitoring geopolitical developments and trade negotiations, as these factors will significantly influence market dynamics in the coming months. The potential for a recession and the impact of AI on the labor market are also highlighted as critical areas to watch.