Weekly Investment View: Will US Equities Continue Defying a Q2 Slowdown

This Week

• Global Macro – Bilal thinks record US equity inflows, collapsing US used car prices and China’s deflationary growth model could see strong capital flows into the US fade, weak US demand pressure prices and China continue exporting deflation despite solid GDP growth.
• US Macro – Dominique believes Friday’s durable goods data is key, with expected flat capital goods shipments signaling a Q2 slowdown in equipment capex, likely due to frontloaded imports and weaker manufacturing after tariff shocks.
• US Rates – Antonio argues easier financial conditions are supporting US growth and inflation despite tariffs and a paused Fed, while uncertainty around Fed leadership, potential Treasury issuance cuts, and market positioning reflect risks to economic re-acceleration.
• China – Liang sees policymakers encouraging institutional long-term equity investments amid deflationary pressures and low CGB yields, which are expected to stay low absent a policy shift or rebound in loan demand, supporting bullishness on 10-year CGBs.
• EZ and UK Macro – Henry expects retail sales to show a short-term bounce and the ECB to hold rates but likely cut again by yearend due to tariff risks.
• G10 FX – Ben sees three risks building into September-end. Volatility has reason to increase.

Link to Appendix: Trade Table

Bilal Hafeez – Global Macro

Three things stand out to me:

1) US TIC Data Show Record Purchases of US Stocks

We got May data for US capital flows, and they showed private investors bought $104bn of US equities – the highest since President Trump’s election in November ($130bn). Undoubtedly, Trump’s walk-back from April’s ‘Liberation Day’ tariffs likely helped this flow. The twelve-month pace of purchases is now at its highest on record (Chart 1). Can it get any better? Unlikely, so we take this as a challenge for the dollar going forward.

2) US Used Car Prices Are Collapsing

Last week’s US CPI report showed core goods prices have started to rise on tariffs. Yet used car prices, which are less affected by tariffs, are showing a three-month (annualised) decline of 7%. This suggests underlying weak demand in the economy. The Manheim used car auction price index is showing less of a decline, so this price drop could be temporary. Either way, we are back to watching used car prices.

3) China Is a Global Deflationary Force

We recently got China GDP data, which showed robust growth despite the US-China trade war. Yet China’s growth is still relying on excess production rather than domestic demand. For example, industrial production is strong, but retail sales are weak. The clear consequence of this should be lower prices, and that is indeed what we are seeing. China’s Q2 GDP deflator fell 1.3% – the ninth straight quarter of declines. This is a powerful global disinflationary pulse, which provides an offset to tariff inflation.

Chart 1: Foreign Buying of US Equities

at Record Highs

Dominique Dwor-Frecaut – US Macro

Friday’s durable goods orders is this week’s most important release, where shipments are a loose proxy for equipment capex in GDP data. Consensus for capital goods shipments ex defence and aircraft is 0.2% MoM (i.e., flat in real terms). This would make for QoQ SAAR growth of 2% for Q2, down from 3.8% in Q1 (i.e., this would signal slower equipment capex in the Q2 GDP, which is released 30 July. This slowdown reflects frontloading of capital goods imports in Q1 to avoid tariffs increases. It could also reflect slower manufacturing growth following the tariff shock.

Chart 2: Capital Goods Shipments Signal Slower

Equipment Capex Spending in Q2

Antonio Del Favero – US Rates

We remain long SOFR Dec25 (Z5) and short 30Y UST.

Three main factors are at play.

1) Amid tariffs, high-ish yields and a paused Fed (suggesting a further slowdown), easier financial conditions (FCs) are the main driver supporting the US economy and inflation. FCs are preventing a more severe economic slowdown for now. The reason is that easier FCs (driven by higher US equities) could prevent households’ consumption (strictly related to nominal GDP) from weakening more. Consumption is key for the US economy.

2) Rumours of President Trump firing Chair Powell. If this happens, it will likely push USD lower and gold, cryptocurrencies and TIPS higher. On balance for equities, it should still be net positive, despite long-end yields rising.

3) The US Treasury could cut coupon issuance materially. This should be bullish for all assets and keep long-end yields in check.

We are flat on long Z5 and slightly up on short 30Y UST. We have tight stop losses given uncertainty. No changes, but the state of the US economy remains key. I am quantifying re-acceleration risks.

Chart 3 and 4: FCs Easing Is Main Tailwind to Nominal GDP and Core CPI Momentum

Liang Ding – China

This week’s Q2 ETF reports showed the so-called ‘National Team’ spent approximately RMB 150bn during the ‘Liberation Day’ market turmoil.

Unlike in 2024, when Central Huijin actively purchased for months, in 2025, it has primarily been a market stabiliser, engaging only during market turmoil. The ‘PBoC put’ also aims to encourage institutional investors to boost equity investments, offering stable, long-term capital to the stock market.

Since the CGB yield is now 100bp below the equity market’s dividend yield (Chart 5), insurance companies are expected to gradually increase equity investments, especially in high-dividend sectors like banks and utilities. In October 2023 and again this month, the insurance regulator extended the performance measurement period for life and property insurance products from one year to five years. This should support the mainland equity market medium term.

The recent rise in equity market sentiment has pressured CGBs. However, policymaker’s encouraging of long-term investors’ equity investments suggests it will likely keep the CGB yield low to motivate such purchases.

So far, CGB yields have traded within a narrow 5bp range. To break the trading range to the upside, one of two conditions is expected to be met. First, an improvement in loan demand to ease the banking sector’s scarcity of safe-haven demand. Second, a change of the PBoC’s easing policy stance.

We do not expect deflationary pressure to be solved quickly without a large-scale demand-side boost, given an expected slowdown in export growth. We remain bullish on the 10-year CGB.

Chart 5: CSI 300 Dividend Yield vs 10-Year CGB Yield

Henry Occleston – Eurozone & UK Macro

The main takeaways from this morning’s UK public sector deficit data were:

• PSNB was higher than expected by market and by OBR.
• YTD PSNB and CGNB now align with OBR estimates from March, but on a deleterious trajectory. The underspend YTD in investment is the saving grace, not really a positive.
• CGNCR is well above OBR YTD estimates already.
• The big drivers of April’s miss are:
  1. Interest overshoot (YTD £786mn overshoot),
  2. Income tax undershoot (YTD £2bn undershoot) and
  3. VAT* undershoot (YTD £2.8bn undershoot).
  4. This is offset by £5bn in investment underspend YTD.
• The income tax undershoot is to be expected, and what we have long warned of, as the OBR bases employment estimates on LFS data, not PAYE (Chart 6).

For June UK retail sales (released on Friday), the market is looking for a bounce-back after May’s large decline. We would read little into this if it were realised. We see little chance for the UK consumer to stage the kind of recovery the BoE is banking on given labour market pressures.

The ECB makes its policy rate decision on Thursday. We agree with consensus for the deposit rate to remain unchanged. Data is unlikely to force them to continue easing near term. However, tariff risk has intermittently dominated their reaction function, and their base case of 10% tariffs is likely too low. As such, another cut by yearend is highly probable.

Chart 6: Income Tax Undershoot of OBR Forecast

Unsurprising as OBR Models on LFS Employment

Ben Ford – G10 FX

Volatility has settled from Q2’s highs. The market is in limbo, awaiting confirmation on tariffs’ impact. We see three risks for G10 FX moving into September-end/Q4 start:

1. Equities tire out. S&P 500 is trading at all-time highs with earnings season beating expectations. Flows are only accelerating: Citadel report strong retail buying and room for institutional players increase positions. However, they expect positions to be full and slowing by end-September. This means the ‘easy money’ in equities could be tired by then.
2. Tariff realisation finally enters the chat. Trump delayed the tariffs deadline to 1 August. Countries could get a deal out of this. Maybe even good ones. However, several currencies have a positive relationship with risk and US yields. This means they could still be impacted by a deterioration in US data if not by tariff deals.
3. Politics returns to the fore. While Japan comes first, a culmination of political risks are now due. French Prime Minister Bayrou will be preparing to send the draft budget to parliament, PM Starmer will look to hint at tax rises due in the Autumn Budget at Labour’s party conference, PM Ishiba’s job could be in danger with little solution for food prices, immigration and tariff damage sorted by then; and Trump will (even in the most sensible of cases) be preparing to name Chair Powell’s replacement.

Appendix: Trade Tables

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