Growth forecast for U.S. hits zero, even with 100pt cut

In our latest trade floor update, I sit down with Kanish Chugh, PIMCO's Head of ETF Sales to discuss what the U.S. tariffs mean for the Fed, the RBA and markets, and the implications for investment portfolios.

Kanish Chugh: Hi. Welcome to this month's trade floor update. I'm joined by portfolio manager Aaditya Thakur. Aaditya, how will the recent tariff announcements impact the U.S. economy, and what are the implications for Fed policy and interest rates?

Aaditya Thakur: Yes, so the tariff policy that was announced this week, is the biggest shift in U.S. trade policy in over a century. So the effective tariff rate now in the US jumps from a little under 5% to somewhere in the range of 18 to 22%, depending on the assumptions that you use.

So in terms of the implications for the U.S. economy, we had already downgraded our growth and inflation forecast for the year to around 1.5% for GDP and inflation to rise to around 3%.

Now after these tariff changes, which were worse than what the market anticipated, we've now downgraded our growth estimate to around zero for the U.S., between zero and half a percent and inflation up to almost 4%.

So this is really a stagflationary type environment for the Fed, and that'll be very challenging because we know that inflation expectations have already risen. So for them to deliver interest rate cuts in the face of higher inflation and higher inflation expectations, that's going to be quite difficult. But we do think that the growth outlook and rising unemployment, off the back of these changes, will force their hand to cut interest rates and the market is now pricing almost 100 basis points of further easing, taking the Fed cash rate to a low 3%.

For the rest of the world, obviously this is going to be a huge disruption. Global trade will fall. There'll be lower growth in other regions, particularly trade exposed regions of Asia. And we feel that lower growth will lead to greater easing by fiscal policy and monetary policy elsewhere as well.

Chugh: Locally, with the recent budget and the federal election being called alongside softer unemployment and inflation data, what are the implications for the RBA's rate cutting policy decisions?

And also, what are the implications clients need to consider in how they position portfolios in the current environment?

Thakur: So, locally if we looked at things somewhat in isolation we still felt that given the inflation profile, our inflation expectations for the rest of this year, and the ongoing soft growth in the private sector, and some signs of weakening in the labour market, we felt that the RBA would still need to deliver at least another 2 to 3 rate cuts.

Now, obviously, given the global developments, there's further downside risk to that.

So at the moment, the market's pricing in the RBA to cut rates to around 3.35. And we still feel that given the skew of risk there's a little bit more work that the market can do.

In terms of how investors should be positioning, we still think that you should be defensively positioned. If we look at equities, for example, broadly speaking S&P is about 13% off its highs. That's well and truly a normal market correction.

And investors should be thinking, given this is the biggest shift in trade policy, a huge global disruption event, is that enough? And we think that it's not.

We think that the risks are to further downside for risk assets and the scope for markets to price in a deeper rate cutting cycle. So from that perspective, we think that investors should still retain a very defensive positioning, be up in quality, and certainly based on the market moves that's how we're continuing to position our portfolios.

Chugh: Great. Appreciate those insights Aaditya.

So as we've heard, with rising geopolitical and trade tensions, clear challenges for riskier assets, bonds are offering a sense of stability for investors.

Please go to our website or speak to your PIMCO account manager for any questions you may have.