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Thought of the day

US consumer inflation for July was in line with market expectations, with the build in price pressures unlikely to derail a Federal Reserve interest rate cut in September. US stocks rallied to all-time highs, the yield on the 2-year Treasuries fell, and the US dollar weakened.

Recent market developments have reinforced investor expectations that the Fed is likely to resume policy easing imminently. Fed fund futures now indicate a near 95% chance of a rate cut when the Federal Open Market Committee meets on 17 September, up from less than 60% a month ago. Debates over a bigger 50-basis-point cut have also emerged in the market given the softening labor market, with US Treasury Secretary Scott Bessent suggesting that the Fed should consider more aggressive easing.

Our view is that inflation will likely continue on a gradual upward trend as businesses pass on higher costs, but slowing shelter inflation and push-back from increasingly stretched consumers should help offset some of the tariff impact. As the labor market continues to weaken, we think the US central bank will resume interest rate cuts next month, with 25-basis-point cuts at each meeting through January 2026 for a total of 100 basis points.

This backdrop of Fed easing is supportive of equities, quality bonds, and gold. Here we outline how we would position as markets navigate a combination of fast-moving headlines, evolving policies, and economic uncertainty.

Equities have further room to run, but investors should not overlook volatility. Fed rate cuts in non-recessionary periods have historically been favorable for the equity market, and we believe this time is no exception. Additionally, second-quarter earnings have been robust, while structural drivers such as artificial intelligence remain intact. We continue to expect gains over the next 12 months. However, while the VIX index of implied stock volatility has fallen to the lowest level since December last year, market swings could pick up quickly if trade tensions escalate significantly, economic data weakens faster than expected, or if geopolitical risks worsen. Investors who are already allocated to equities in line with their strategic benchmarks should consider structured strategies with capital preservation features, while those underallocated should prepare to add exposure on potential market dips or consider a disciplined approach to phasing into stocks.

Quality fixed income offers attractive risk-reward and diversification benefits. Lower policy rates are likely to push Treasury yields down. Accordingly, we expect government and investment grade bonds to deliver mid-single-digit returns over the next 12 months. Quality bonds also look appealing if US economic growth disappoints and data weakens more than expected, as yields would fall quickly, delivering significant capital gains. With current yields still attractive, investors should consider putting additional liquidity to work as cash underperforms on a longer-term basis. We prefer medium-duration quality bonds, and see select credit opportunities across Asia and Europe.

Gold remains an effective portfolio hedge. Interest rate cuts have long been supportive of gold prices given the yellow metal is non-interest bearing. While bullion has rallied 27% this year, we believe portfolio diversifiers like gold remain highly relevant for investors. The latest World Gold Council report highlights strong investor demand, which we think should persist, while central bank purchases should remain robust amid the de-dollarization trend. Economic, geopolitical, and policy uncertainties also increase the importance of portfolio hedges, and we reiterate that an allocation of a mid-single-digit percentage to gold in a well-diversified portfolio is optimal for investors with an affinity to the yellow metal.

We continue to believe that a well-diversified portfolio can help investors withstand volatility while positioning for future gains. Investors willing and able to manage risks inherent to alternatives can also consider exposure to hedge funds and private markets.