Q3 Macro Outlook: Less Chaos, More Clarity
Author: John J. Hardy, Global Head of Macro Strategy
The upcoming quarter is expected to reveal how the tumultuous events of Q2, particularly the implications of Trump's "Liberation Day" tariffs, are influencing the global economy and market sentiment.
Key Themes for Q3
US-China Relations
China's role as "the world’s factory" remains critical, especially regarding rare earth metals, which are essential for various industrial applications. After a brief halt in exports, China has resumed rare earth shipments but is limiting export licenses, indicating its leverage in the trade relationship. The US also holds significant leverage through its exports of key components and chemicals.
US Trade Deals
President Trump is anticipated to announce new tariffs targeting countries perceived as negotiating in bad faith. The focus will be on trade negotiations with Japan and Europe, with tariffs expected to remain substantial, potentially averaging 12-18%.
Geopolitical Tensions: Iran-Israel Conflict
Renewed hostilities between Israel and Iran could impact oil markets and inflation. Central banks may overlook energy-driven price spikes if they affect overall sentiment and growth prospects.
US Recession Risks
There are rising recession risks in the second half of the year, driven by a post-tariff slowdown and high policy rates from the Federal Reserve. The housing market is showing signs of deterioration, and the potential for a mild recession is anticipated before inflationary growth resumes.
Market Predictions
Currency and Commodities
The US dollar is expected to remain weak, while precious metals are likely to continue their strong performance. The commodities sector has seen a robust first half, driven by geopolitical risks and demand for tangible assets, particularly gold and silver.
Equities Outlook
US equities may underperform relative to global peers as the market adjusts to a rebalancing away from US exceptionalism. A potential aggressive rate cut by the Fed could lead to a short-term rally in equities, but a recession would likely result in decreased corporate profits and increased volatility.
Geopolitical Risks
Geopolitical tensions, particularly between Iran and Israel and the US-China relationship, pose significant risks to the economic outlook. Any unexpected escalation could lead to a spike in global energy prices and a hard landing for global growth.
Conclusion
The Q3 outlook suggests a complex interplay of geopolitical tensions, trade negotiations, and economic indicators that will shape market dynamics. Investors should remain vigilant as the landscape evolves.