Long week, shorter duration

Bottom line up top:

• With more than a dozen data releases, a U.S. Federal Reserve policy meeting and a scramble among U.S. trading partners to strike a tariff deal before the Trump administration’s 01 Aug deadline, the last week of July was one of the more portentous periods financial markets have grappled with in some time.
  
  Until Friday’s unexpectedly anemic employment report, much of the incoming information was generally positive, from a rebound in consumer confidence to a big upside surprise in headline GDP growth to consensus-beating earnings reports for four of the Magnificent Seven mega cap tech names. Amid the data deluge, the S&P 500 Index spent most of its time treading water or edging lower instead of finding higher ground as it had done in the prior two weeks.
  
  The decline in equities continued on news that the U.S. economy added only +73,000 jobs in July (versus the +115,000 consensus forecast), and that May and June payrolls were revised downward by a combined -258,000. The S&P 500 and other major benchmarks snapped a two week winning streak as investors weighed the negative implications of a labor market that now looked considerably less resilient. Following the jobs report, markets fully priced in two Fed rate cuts for the remainder of the year, while the odds of only one cut decreased (Figure 1).
  
  The outlook for rate cuts is complicated, however, by the prospect of higher inflation. Last week’s release of the Personal Consumption Expenditures (PCE) Price Index for June showed core inflation coming in slightly hotter than expected, and at 2.8% year-over-year, still stubbornly above the Fed’s 2% target. And with definitively higher U.S. tariff rates now in place, upward pressure on inflation will likely increase. The Fed’s decision to leave its policy rate unchanged at last Wednesday’s meeting (accompanied by hawkish rhetoric from Chair Jerome Powell) underscores the delicate balance the central bank needs to strike between taming inflation and supporting the labor market. For now, a key takeaway from last week’s messy mix of economic news is that higher-for-longer interest rates could remain a headwind for financial markets. Accordingly, investors may want to reassess how they approach duration in their portfolios.
  
  

Portfolio considerations

Uncertainty has been the watchword of 2025. Ever since the Trump Administration began ramping up tough trade talk, companies have been grappling with on-again, off-again U.S. tariff announcements, bracing for trade deals and trying to figure out how the ultimate outcomes would affect their businesses. Our initial baseline estimate for the effective tariff rate the U.S. would levy on imports was 9.5% (Figure 2). We’ve bumped that baseline up to 12.3% to reflect specific trade deals announced between the U.S. and a number of its trading partners (the European Union, United Kingdom, Japan, Vietnam and others) over the past few weeks. While our new estimate is higher, it’s well below Liberation Day levels that would have brought the effective tariff rate to 20.4%.

The impact of tariffs on inflation has so far has been limited, but we estimate core PCE inflation will end the year at 3.0%, a modest increase from current levels. And while we still expect a total of 50 basis points (bps) in rate cuts in 2025, we have lowered our 2026 forecast for 2026 from 75 bps to 50 bps — reflecting the risk of inflation remaining above the Fed’s 2% target. As part of its dual mandate to support price stability In taxable fixed income, we and full employment, the Fed is also keeping a close eye on the labor market. The unemployment rate has held steady in a range of 4.0-4.2% over the past 14 months, but we anticipate it will end the year higher at 4.5%. Although an increase in unemployment isn’t something to cheer in its own right, it will likely make the Fed more comfortable with rate cuts in the near future.

Lastly, despite a strong headline number in last week’s initial estimate of second-quarter GDP growth (+3.0% annualized), a look under the hood reveals signs of economic weakness. Final sales to private domestic purchasers, a key metric of underlying demand, rose at its slowest pace (+1.2%) since 2022. And without a 5% contribution from net exports (due to a tariff-driven 30% decline in imports), Q2 GDP growth would have been -2%. We expect a broader economic slowdown in the pace of expansion, ending the year at a tepid +1.0%.

With upside risks to inflation and a growing U.S. fiscal deficit, intermediate- to longer-dated yields will likely remain elevated. This limits the positive impact of owning duration in taxable fixed income sectors on a portfolio. For that reason, in the taxable space we continue to favor shorter-duration sectors such as securitized assets (commercial mortgage-backed securities, for example) and senior loans. Both areas offer attractive levels of income, healthy fundamentals and limited exposure to interest rate risk.

Nuveen’s Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.

Regular meetings of the GIC lead to published outlooks that offer:

• macro and asset class views that gain consensus among our investors
• insights from thematic “deep dive” discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
• guidance on how to turn our insights into action via regular commentary and communications