Fiscal Food Fight
Tariffs, Immigration and Spending reduces the demand for, and supply of labor. Our capex recovery thesis is intact, but Fed resuming rate cuts are on hold.
Food Fight
This has been a super interesting year for our macro policy approach to investment strategy, and this week was particularly fascinating. The employment report was not sufficiently soft to alter the expected monetary policy path, but it contained compelling evidence that the Administration’s immigration, government spending and trade policies have reduced demand for, and the supply of, workers. The net effect may, repeat may, be a stabilization in the cooling trend for wage growth, leading to considerable, and for now, unanswerable, questions about productivity growth. In addition to the employment data, there were important developments in financial sector regulatory policy, and last but definitely not least, there was the fiscal food fight between the Senate, the House, the President and the outgoing Head of DOGE. While we are sympathetic to Elon’s crusade, he seems to be ignoring the positive corporate investment tax implications of 1BBBA, which are a key component of our 2H25 recovery in capex theme that is critical to our bullish equity market outlook.
Despite the fiscal food fight over 1BBBA (One Big Beautiful Bill Act), the Treasury Curve bear flattened (short rates up more than long), breakeven inflation rates were lower, the equity market rallied led by beneficiaries of a recovery in capital investment (tech, communication services, industrials, materials and energy), with consumer facing and interest rate sensitive sectors lagging. Small caps rallied, but as we explain later, we would avoid them until and unless the FOMC restarts the rate cut cycle, an outcome that was probably delayed by the employment report.
In this week’s note that we are finalizing sitting in a hotel room in Cincinatti before a wedding on Friday evening, we discuss employment, inflation, regulatory, fiscal and monetary policy. We focus on the implications of the macro policy developments for two of our most important investment themes; a capital investment recovery and further steepening of the Treasury curve and improvement in small, spread sensitive bank profitability.
