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There’s a well-worn investing cliché that “markets hate uncertainty.” While often repeated, it’s somewhat tautological – uncertainty is intrinsic to investing, and a wider distribution of outcomes naturally demands higher risk premia. What’s less mentioned, however, is the inverse: markets love a reduction in uncertainty, even when the resolution of that uncertainty is not ideal.

Nowhere is this more evident than in recent market reactions to US tariff policy. Whether deals with individual countries have been struck or not, tariffs have only moved in one direction – up. Yet, as the range of potential outcomes has narrowed and worst-case scenarios have been avoided, policy uncertainty has declined. A 15% tariff on European imports feels manageable when 50% was on the table just weeks ago. Risk assets have responded more to this reduction in uncertainty than to the tariffs themselves, as the left tail of the distribution has effectively been truncated.��

Exhibit 1: The effective tariff rate has been rising

United States average tariff rate on all imports

Exhibit��2: While trade policy uncertainty has drifted lower

Global Trade Policy Uncertainty

The passage of the One Big Beautiful Bill Act (OBBBA) has similarly brought clarity. Earlier this year, 10-year Treasury yields surged to 4.80% in part due to fears of unchecked fiscal expansion to fund Trump’s extended tax cuts. But those elevated yields forced lawmakers to scale back their plans for fiscal expansion, which together with increased tariff revenues helped temper concerns about runaway deficits. While deficits remain high – 6%–7% of GDP for the foreseeable future – the market now has greater confidence that deficit expansion won’t worsen. It’s a far-from-ideal outcome, but one that has helped stabilize bond market volatility, which recently neared a cycle low.

Exhibit 3: Bond volatility near cycle lows

Bond colatility

This reduction in uncertainty matters not just for investors, but for companies as well. Greater clarity on tariffs enables even the most exposed importers to plan pricing strategies and adjust supply chains. The OBBBA also clarified tax treatment for capex and R&D, improving visibility for investment and cash management decisions. The ability to ‘move on’ can be a nice tailwind.

While some policy questions remain – sector-specific tariffs on semiconductors and pharmaceuticals, or potential secondary sanctions on Russian oil – the scope for major macro policy surprises from ‘known unknowns’ has narrowed. As a result, market focus is shifting to the economic data.

In the previous Macro Monthly, we asked whether markets could look through a weakening economy if policy shocks were already known and understood. Our answer was yes – providing the labor market held up.

On that front, the July employment report released Friday was a gut check. While the headline numbers weren’t alarming – 73,000 jobs added vs. 100,000 expected, and unemployment at 4.25% (slightly above the 4.2% forecast) – the real surprise was a sharp 258,000 downward revision to May and June figures. This brought the three-month average job growth down from 150,000 to just 35,000.

Markets swiftly priced in a more aggressive path of Fed rate cuts, reflecting a labor market that now appears significantly softer than previously anticipated. Part of this reflects reduced labor supply, with declining immigration weighing on the workforce. Still, this shift likely clears the way for the Fed to begin cutting rates in September, despite valid concerns about rising inflation. Encouragingly, inflation expectations remain anchored: one-year inflation swaps reflect tariff impacts, but forward-looking expectations remain stable.

����󾱲�������4: 1Y inflation expectations reflect tariffs, the market-pricing of forward looking inflation expectations beyond 1y are remarkably stable

US inflation swaps

Note: US Inflation Swap 1y1y shows the swap contract starting in 1y and running for 1y.

Is the Fed too late to prevent an unraveling of the labor market and recession? We don’t think so. It’s reasonable that hiring slowed in the spring amid post-Liberation Day uncertainty. But after an initial spike, jobless claims have been trending lower. The labor market remains low-churn, with limited hiring or firing. Nominal income growth remains solid. High-frequency indicators – like tax receipt growth and card spending – suggest consumers are holding up, as do corporate anecdotes.

Exhibit 5: Initial jobless claims spiked around the spring, but have dropped off in the summer

Jobless claims, % YoY

In our view the ’muddle-through’ economy should benefit from accelerated rate cuts, upcoming tax relief, and continued AI-driven capital investment.

We remain constructive on the medium-term outlook for risk assets. We believe greater policy clarity – even with lingering macro risks – is a strong tailwind. Corporate America has proven resilient through multiple shocks and continues to deliver on earnings. That said, we’re entering a seasonally weaker period, and near-term data may be volatile, especially as markets are likely to have heightened focus on the Fed’s reaction function. We think a market pullback would be normal – and could present a buying opportunity.

While we expect the US and global economy to cool but remain resilient, a sharper slowdown is still possible. Although there are ongoing concerns about government debt levels and persistent inflation, we remain confident that, in the event of a deeper economic slowdown, flight-to-safety flows which would support the Treasury market will take precedence over these issues. We remain short USD as the US economy and rates ‘catch down’ to the rest of the world. The muddle through economy is a good environment for carry, which we express in EM local currency debt. We continue to hold exposure to precious metals as a hedge against inflation expectations becoming de-anchored and any potential geopolitical shocks.

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