The global macro environment has shifted in a short period of time to one of heightened uncertainty from the broadly `Goldilocks’ state that prevailed at the end of 2025. At that time, resilient growth and easing inflation seemed to coexist.
It appeared as though disinflationary forces were taking hold: Services inflation was moderating, and energy prices were stable, while labour markets were cooling. A reasonable interpretation was that inflation could normalise without any deterioration in growth.
However, we now see an increasingly complex interplay of growth, inflation and policy.
In the US, as mid-term elections approach, the Trump administration appears to want to sustain economic momentum, using fiscal and other measures. Recent policy signals indicate a desire for stronger nominal growth and a tolerance for higher inflation, at least in the short term. The lack of concern over a depreciating US dollar suggests policy priorities may be tilting towards growth and supporting domestic demand.
At the same time, the administration appears intent on limiting upward pressure on government borrowing costs. This creates a difficult balancing act – and one in which the Federal Reserve will play a crucial role.
Recent strength in commodity prices, combined with a weaker dollar, has raised concerns that inflation pressures could re-emerge sooner than previously anticipated, despite ongoing easing in labour market conditions and continued moderation in shelter inflation. Some of these dynamics may reflect transitory factors, including weather-related fluctuations in natural gas prices, suggesting that near-term inflation signals should be interpreted with caution.
Regime change
At the end of January, President Trump appointed Kevin Warsh as the Fed’s new chair. Warsh has more recently expressed support for lower policy rates. However, his historical track record places him toward the more hawkish end of the spectrum, particularly with respect to balance sheet policy.
Given Warsh’s appointment, any deviation from the established path is expected to be incremental rather than sweeping. Market participants should anticipate subtle shifts, with the central bank likely to tread cautiously amidst ongoing uncertainty.
Warsh had already sat on the central bank’s board from 2006 to 2011. Now, he is not the only new appointment: several new voting members joining in 2026 could also lead the central bank into more hawkish territory.
That said, it is reasonable to expect only limited changes in policy direction. The Federal Reserve continues to operate within institutional, legal and political constraints. Moreover, the Federal Open Market Committee – which sets interest rates among other duties – still has broad composition, limiting the scope for abrupt shifts.
Before Warsh’s appointment, markets had been expecting a more overtly accommodative Fed Chair.
After his appointment, markets slipped slightly, while the dollar briefly strengthened.
Global expectations
Outside the US, currency strength in several developed markets — Australia, New Zealand and the Euro Area to name three — may support disinflation trends, giving central banks in those regions greater flexibility.
In Frankfurt, policymakers may welcome contained inflation, but deep structural growth challenges persist. Chinese competition and low productivity sit like a millstone on industrial momentum, compressing it. They may also gaze over the Rhine, at French political fragmentation and fiscal imbalances. Risks abound.
If any Eurozone central banker wishes to see brighter lights, they can find them in the Eurozone periphery. Furthermore, the United Kingdom stands out as an appealing developed market, with high yields, a weakening labour market, an improving inflation outlook and credible fiscal tightening all looking capable of generating Gilt outperformance.
Further afield, economic momentum in Australia and New Zealand has strengthened in recent quarters, prompting markets to price in a higher probability of rate hikes. While caution may be warranted in Australia, pricing in New Zealand appears somewhat overdone, with parts of the bond market offering attractive value.
The view from here
Despite these positive patches, geopolitical uncertainty remains the norm. Trump’s desire to acquire Greenland, the capture and deposition of Venezuela’s president and harsh rhetoric towards Iran are causing an upheaval. A more unilateral and transactional stance, including renewed tariff threats, has prompted some European and other allies to reassess the reliability of the United States as a strategic partner.
With some investors concerned about public debt sustainability, especially in advanced economies, it is small wonder that some have allocated to real assets or emerging market debt. Select emerging market countries feature lower debt burdens and favourable demographics. Their central banks have also acted decisively against inflation.
This all supports a constructive stance on global rates as well as diversified exposure across the U.K., Eurozone periphery, and New Zealand.
The mixed US picture suggests a hedge rather than a core conviction.
In credit, although temporary air pockets are possible in our view, spreads are likely to remain stable to modestly wider, underpinned by moderate growth, accommodative policy and broadly solid fundamentals. Sector dispersion favours a defensive focus on sectors like healthcare, communications, consumer staples while financials remain attractive, thanks to their relative value and balance sheet strength.
The era where the relationship between growth and inflation seemed to be just right has given way to an uncertain landscape for fixed income investments. Policy direction in the United States — both fiscal and geopolitical — has become less predictable, adding another layer of complexity for investors. Therefore, it’s essential to identify markets with credible policy and improving fundamentals. That makes active management and careful credit selection all the more important in today’s environment and we believe our flexible approach will stand us in good stead in the coming days.
The value of active minds: independent thinking
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