US growth scare paused, surge in US inflows (TIC), where's the tariff impact on inflation?

Avatar

VP Research

NotesAsset AllocationnoramUScurrencyGlobal Macrodmfixed income
  • US growth scare paused as retail sales and industrial production return to growth
  • Some labor risks still lurk for 3Q25 as tariff revenue surpasses 100bn for 2025
  • Macro Risk Indicator turning "risk on" => underlying conditions are good for asset prices if we avoid tariff shocks
  • TIC data shows net foreign inflows into US assets surged in May
  • Tariff impact still barely visible in inflation data

US growth scare paused as retail sales and industrial production return to growth

US retail sales and industrial production are both growing again month-on-month, after contracting over the previous 2 months. The previous data has also been revised marginally higher.

This means the risk of a growth scare is now lower. Historically, when we have seen US growth momentum stall, the forward looking outcome is binary. It either marks the start of recessionary dynamics, or it tends to mark the bottom during mid-cycle slowdowns. The data this week suggests imminent recession risks are diminishing. The next key data release we are tracking is the update for US home prices at the end of the month. The Case-Shiller 20 city home price index has been contracting MoM for the previous 2 months.

Some labor risks still lurk for 3Q25 as tariff revenue surpasses 100bn for 2025

One area of concern remains the US labor market. ADP's private employment data is contracting month-on-month, while we continue to see WARN notices tick up.

Historically, when corporate profit margins start to shrink, it results in layoffs. Profit margin expectations have turned more negative as a result of the tariffs. The US treasury has collected more than 100bn USD of tariff revenues so far in 2025, which is worth around 2.6% of annualized corporate profits. The risk remains that tariffs eat into corporate profits.

It is possible this time corporations choose to eat the higher costs related to tariffs rather than make mass layoffs. Profit margins are at historically elevated levels so there is room for some mean-reversion. The passage of the One Big Beautiful Bill also provides meaningful tax incentives for corporations to front-load capex going forwards. The regional Fed future employment surveys have also stopped falling and are recovering slowly.

The labor market is the key mechanism through which recessionary feedback loops operate. We await the August data releases for more clarity.

Macro Risk Indicator turning "risk on" => underlying conditions are good for asset prices if we avoid tariff shocks

Our Macro Risk Indicator was designed to translate our best business cycle models into a single number to help determine cyclical risk exposure. The model was not designed to capture tariff noise, but should still be treated as very useful anchor.

The current improvement is driven by the recovery in our China growth impulse leading indicator and our Business Cycle Financing Index, which has surged as most global central banks are easing monetary policy.

Analyst earnings estimate revisions are also positive again, but not yet at contrarian levels. Our leading indicator for US EPS growth is running at 8.7% annualized growth, which is in the range of the consensus estimates for 6.5% annualized growth for 4Q25 and 9% growth for calendar year 2025.

TIC data shows net foreign inflows into US assets surged in May

Net inflows into US assets surged in May according to the Treasury International Capital (TIC) data. Short positioning remains stretched on the USD, so this could offer narrative support for a USD squeeze.

Structurally, we still think that the path of least resistance for a global rebalancing is for the Trump administration to engineer a USD devaluation (see our thematic report Understanding Global Imbalances: Revelation, not Revolution). However, nothing moves in a straight line and the narratives are likely to shift to justify a USD squeeze.

Tariff impact still barely visible in inflation data

We still think there is good risk-reward from here to bet on more Fed cuts, buying dips in the SOFR March 2026 futures. So far, tariff impacts on inflation are muted. Goods and services CPI and PPI, as well as the US import price index all remain relatively muted over the past 3 months.

Our global diffusion of inflation leading inputs is still trending down, supporting the view that inflation is more likely to surprise to the downside vs tariff fears. The ISM survey of intentions to raise prices has also rolled over.