Dear Valued Clients,
Investors continue to navigate a complex environment marked by tariffs, inflation concerns, and shifting economic growth dynamics. Despite the continued uncertainty, the economy has proven more resilient than many feared. Inflation remains above target but contained, growth is slowing but not collapsing, and earnings have delivered broadly solid results. At the same time, the Federal Reserve is preparing to ease policy against a backdrop of cooling momentum. In this commentary, we examine how these themes are shaping the outlook and where we see opportunities and risks for disciplined investors.
Tariffs: Impact Absorbed, Not Escalating
Earlier this year, tariffs were a central worry—expected to fuel inflation and risk derailing growth. In practice, they have raised costs in select categories, but the broader inflationary effect is still working its way through the economy. Businesses have absorbed part of the impact through inventories and supply-chain adjustments, delaying some of the pass-through to consumers. Even so, the July CPI registered 2.7% year-over-year, with core inflation above 3% for the first time in six months. The Fed’s preferred gauge, core PCE, is running near 2.9%—sticky, but not accelerating. These figures suggest that while tariffs continue to add friction, they have not unleashed the feared inflation spike or forced the economy off course.
The Fed: Comfortable Easing into a Slowdown
Markets now see nearly a 90% chance of a 25-basis-point cut in September. At Jackson Hole last month, Powell stressed that inflation risks are contained and growth is slowing, but not stalling. The data support this view. Manufacturing PMI rebounded to 53.3 in August, moving back into expansion. Services PMI held at a healthy 55.4, lifting the composite to its highest level in eight months. Housing also surprised on the upside, with existing home sales up 2.0% in July to a 4.01 million annual pace. These numbers show a cooling economy, not a collapsing one, and give the Fed room to ease without reigniting inflation.
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