Q2 2025 Macro Situation Report
For a refresher on our analytical framework, click here.
For our portfolio commentary for the period, click here.
Summary
As a reminder:
🌸Macro Spring🌸 = accelerating GDP growth rates and decelerating inflation rates.
☀️Macro Summer☀️ = accelerating GDP growth rates and accelerating inflation rates.
🍁Macro Fall🍁 = decelerating GDP growth rates and accelerating inflation rates.
❄️Macro Winter❄️ = decelerating GDP growth rates and decelerating inflation rates.
United States of America
With structural market changes, intensifying geopolitical frictions, rising economic cycle fragility, and the timeline for major macro and policy catalysts all converging, the surface area of risk will continue to expand in the 2nd half of 2025. We will review what happened in the 1st half of 2025, detail our expectations around the immediate future, and assess the near term asymmetry in inflation.
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The Rest of the World (RoW)
It is ☀️Macro Summer☀️ summer time.
While U.S. tariff policy has captured headlines, the broader global economy has quietly sustained its momentum, with ☀️Macro Summer☀️ conditions remaining intact.
International trade did not retreat—it rerouted—allowing countries like Germany, Belgium, Australia, and India to emerge as new beneficiaries of shifting global supply chains. These nations have seized the opportunity to expand their economic footprints, helping drive a sustained growth regime even as traditional industrial powers recalibrate.
Meanwhile, a weaker US dollar (USD) (down 10.5% from its peak at the start of the year) has provided a powerful tailwind and eased financial conditions abroad. As a result, the global macro environment continues to defy stagflationary (🍁Macro Fall🍁) fears, propelled by favorable currency dynamics and resilient trade flows that reinforce the persistence of growth.
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Policy Impacts
Tax Cuts, Tariffs, Trade Wars, and Stablecoins, O MY!
Q3 2025 will mark the intermediate period between the adverse 1st half of 2025 as seen by the DOGE/Trade War dynamics and the light at the end of the tunnel in Q4 2025 and Q1 2026 from the Tax Cuts.
This will be the period where these policy impacts on growth and inflation will incrementally manifest on both growth and inflation.
Moreover, the One Big Beautiful Bill (OBBB) will perpetuate the prevailing condition set of higher deficits/debt.
Recent developments around Stablecoins and Bank Regulation will swoop in to create new demand channel incentives for owning US Treasuries (USTs) just as the outlook for Fiscal recklessness gets turbocharged.
United States of America
The first half of 2025 could be summed up in the phrase “Nothing Ever Happens” if you just look at how it started and how it ended.
Source: Factset, Bloomberg, Hedgeye Risk Management
We must not forget that the difference between what people say in surveys and what they actually do are so wide at this point that many of these soft survey indicators might be structurally broken.
Source: Census BTOS, Hedgeye Risk Management
Ironically, it can make analysis easier because you can ignore what people say altogether and focus on what they do.
Whether it is regarding corporate intentions on hirings or households on their income expectations, the divergence is clear.
Source: Census BTOS, University of Michigan, Bloomberg, Hedgeye Risk Management
Then there is what the sovereign says about fiscal discipline and then there is what is done about fiscal discipline (or not).
“We all know what to do, we just don’t know how to get re-elected after we’ve done it.”
Source: Factset, Hedgeye Risk Management
As history shows, if you have a protectionist regime shift where domestic initiatives need to be funded and capital is scarce, explicit or veiled Capital Controls eventually become an inevitability.
The Eurozone has made it abundantly clear that is the case and is not likely the last.
Source: ECB, Bloomberg, Hedgeye Risk Management
Employment
On the employment side we continue to see the same pattern as indicated for years at this point.
We see labor hoarding until protracted weakness catalyzes payroll reduction.
As a reminder, labor deceleration follows this sequence:
1-First You Reduce Overtime Hours.
2-Then You Cut Temporary Staffing.
3-Then You Cut Hours for Everyone Else.
4-Then You Slow/Stop Hiring.
5-Then Quits Fall as Macro Conditions Tighten.
Source: Factset, BLS, Hedgeye Risk Management
The slowdown in hiring has slowed the transition from unemployed to employed thus making job finding more difficult.
Source: Factset, BLS, Hedgeye Risk Management
The continuing unemployment claims are more notable especially relative to recent history.
Source: Factset, Bloomberg, Hedgeye Risk Management
Almost every labor chart looks like the below and labor based recession calls could have been crafted at any point over the past 2 years.
It’s benign until it isn’t but cycle fragility is now at its highest point post-pandemic and more yellow flags are emerging.
For example, we continue to see fewer full time workers relative to part time (a sign of weakening) and fewer workers saying jobs are plentiful relative to workers saying jobs are hard to get.
In a phrase, it is a glacially slow melting of labor strength.
Source: Factset, Bloomberg, Hedgeye Risk Management
Now you may ask “Is Artificial Intelligence (AI) the primary driver of the slowdown in hiring and unemployment?”
Currently, no.
Young workers represent the most new entrants and have the highest job switching rates. They are disproportionately impacted by the question, “who needs to be hired?”and so are disproportionately impacted by a slowdown in hiring.
AI will increasingly matter but its mostly normal cyclicality driving conditions at this time.
Source: CPS/IPUMS, Hedgeye Risk Management
What is different this time around is the reduction in government employment, the reduction in Washington DC Job Postings, and the reduction in Washington DC Job Posting growth rates.
Source: Indeed, Hedgeye Risk Management
Moreover, we continue to see large scale negative revisions to prior estimates of payroll growth.
This suggests employment strength when first measured is vastly overstating the health of the job market.
Specifically, we currently have 3 quarters of QCEW data which are the more comprehensive state level employment data used in generating the annual Non Farm Payroll revision.
The QCEW data currently imply a 907,000 negative revision for the March 2024-March 2025 period. In other words, overestimating payroll growth by nearly 1 million jobs.
Note that those numbers will shift (probably moderate) but the broader takeaway is that 2025 is again tracking towards another large negative revision.
We’ll get the 4th quarter of QCEW later in the summer and the formal revision reported and incorporated in February of next year.
Source: Indeed, Hedgeye Risk Management
Despite the longer term issues with overstating employment strength, we saw a short term countertrend acceleration in employment strength in Q1 2025 and Q2 2025.
Specifically, we saw that despite recession expectations reaching new highs into April, Headline Employment beat all estimates, hiring breadth expanded, full-time employment strengthened, Native Born Employment Spiked, “Core” Private Sector Employment accelerated, and aggregate hours and implied aggregate income growth accelerated.
Source: BLS, Factset, Hedgeye Risk Management
You might ask how the consumer has thus stayed so resilient given everything we discussed.
We must not forget that public sector deficits means private sector income.
Source: Bloomberg, Hedgeye Risk Management
Never underestimate the willingness of Americans to spend!
In the short term, we have seen an increase in wage income combined with a decrease in the savings rate (spending more), and then an increase in bank consumers loans (spending even more).
These observations for the American consumer combined with a global ☀️Macro Summer☀️ setup should not result in an imminent recession.
Source: BEA, Federal Reserve, Hedgeye Risk Management
Inflation
The US Central Bank maintains that 2% per year is the appropriate inflation rate at which all passively held or saved dollars should lose their value.
In May, all dollars ever created that were held over the past year could buy 2.68% less stuff.
Incidentally, you might think college tuition has gotten really expensive and you would be correct to say it has generally gotten more expensive at a faster rate relative to other things…if you price it in USD.
Yale College Tution, Room & Board priced in a debasement resistant monetary asset like gold is near all time lows in cost for the past 125 years.
Source: PricedinGold.com
Still, we have now been above the US Central Bank’s target for 51 consecutive months and expect the rate at which passive savings loses value to accelerate over the coming months.
Source: Bloomberg, Hedgeye Risk Management
Of course with inflation above the desired target, the natural thing to do is to monitor the components that drive this number with less rigor.
Source: BLS, Hedgeye Risk Management
We must not forget that if the USD is down it is reflationary globally.
Source: Factset, Bloomberg, Hedgeye Risk Management
Additionally, both implied future rates of inflation thru the 2Y Inflation Swap (what the annualized 2 year inflation rate expectation will be 2 years from now) as well as the breadth of the components within the CPI that are inflating at greater than 2% (the US Central Bank’s target) went vertical from 50% of the components to 67% of the components.
Source: Factset, Bloomberg, Hedgeye Risk Management
The OBBB is deficit spending and it is inflationary in the near term.
It is, of course, the rate of change that matters and deficit spending is only stimulatory to the extent it is increasing. The OBBB will materially increase deficits in 2026-2029, by an average of 1.5% per year.
2026 and 2027 will see the largest increases in deficits under the OBBB. The CBO Baseline deficit forecast will rise from 5.5% of GDP to 7.0% in 2026, and from 5.2% to 7.0% in 2027.
While a 1.5% and 1.8% increase may not sound like much, consider that those are, under normal times, the size of the entire deficit.
Stated differently, those changes will add an additional $479 Billion and $588 Billion in debt in 2026 and 2027, respectively.
Bear in mind, however, that reductions to overall government spending are nonexistent in 2026 and 2027 and de minimis in 2028 and 2029. The real cuts come in 2030-2034.
Source: CBO, Hedgeye Risk Management
US Treasury (UST) Bill issuance (think 90 day UST bills) is up and Coupon Issuance (think 10 Year USTs) is down which pushes allocations out the risk curve as those who need yield are forced to hunt elsewhere.
“Moneyness” of UST Bills is also higher as they effectively carry no duration risk and serve as the principal collateral instrument in the repo market i.e. the primary funding market, globally.
This a step function increase in UST Bills which increases liquidity in the single biggest source of leverage in the global financial system.
Source: FinancialJuice, Factset, Hedgeye Risk Management
Additionally, the demographics are inflationary.
Social Security Outlays are currently running at ~$1.55 trillion (~4.5% of GDP) and will continue to accelerate as the share of the eligible population rises.
Top heavy (older) demographics are inflationary as financial assets are traded for real world goods and services.
Inflationary dynamics are compounded as cost of living adjustments (COLA) payments are indexed to inflation which functionally leads to higher benefit outlays and higher deficits to pay for those increased benefit payments.
Again, if entitlement spending and interest expense are the primary drivers of deficit spending then:
“We all know what to do, we just don’t know how to get re-elected after we’ve done it.”
Source: Factset, Bloomberg, Hedgeye Risk Management
Tariff collections are happening on a lag which means the flow thru of the inflationary impacts will also be on a lag.
As of May, data suggest just over 50% of intended duties were being collected.
The inflation implications are intuitive.
The tariff front-running of imports provided many businesses with a few months of inventory. If imports have not yet (or only partially) been tariffed, pre-tariff inventory remains mostly unused and If collection efficiency continues to ramp over the next few months, companies won’t face price change decisions – and the full impact of price changes – won’t hit until the middle/back half of 2025.
Source: Bloomberg, Hedgeye Risk Management
The tariff plan for most businesses is to absorb some of the cost thru lower margins but largely attempt to pass thru costs on the consumer.
The survey results below from Duke University and the Richmond and Atlanta Fed cover May 19 thru June 6.
Broadly, the distribution of intended actions indicated below have been similar across the Fed Regional Survey special question sets which have asked similar questions.
Source: Duke University, FRB Richmond, Hedgeye Risk Management
This uncertainty has led to a slowing in expected CAPEX but not at all in stock buybacks.
Source: Duke University, FRB Richmond, Hedgeye Risk Management
Of course taking the view of a reacceleration in inflation is easy when it is already happening.
Source: Factset, Census Bureau, Bloomberg, Hedgeye Risk Management
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The Rest of the World (RoW)
The USD breaking down is fueling global risk appetite and helps perpetuate cycle highs internationally.
Source: Bloomberg, NYSE, Hedgeye Risk Management
The primary winners in this USD weakness have been Europe and Asia-Pacific.
Source: Hedgeye Risk Management
A broadly global yield curve steepening where risk, cyclicals, and commodities are outperforming materially indicates a global ☀️Macro Summer☀️.
Source: Government Statistics, Hedgeye Risk Management
We can certainly see this in Germany where retail sales have emerged from negative territory.
In fact, they were negative for two straight years and now have finally accelerated into positive territory.
Source: Eurostat, Hedgeye Risk Management
German manufacturing confidence has gone to its highest level in 33 months.
Source: S&P Global, Hedgeye Risk Management
German business climate has hit its highest level since April 2023.
Source: IFO, Hedgeye Risk Management
The German manufacturing environment is finally beginning to catch up with expectations.
Source: ZEW, Hedgeye Risk Management
It’s not just Germany feeling the European version of ☀️Macro Summer☀️.
It is also Belgium with strong domestic demand.
Source: Eurostat, Hedgeye Risk Management
Spain too is seeing the highest levels of consumer demand since February 2022.
Source: INE, Hedgeye Risk Management
In fact, Spain is materially accelerating its money supply creation to high single digits.
Source: Bank of Spain, Hedgeye Risk Management
Improving geopolitical risk has helped lower energy prices, helping fuel European production.
Source: NYSE, Hedgeye Risk Management
With regards to international tariffs:
10% blanket tariff likely to stay in effect; the reciprocal tariff is to be delayed further with deals likely between August and December; long term tariff rates likely to be between 10% and the reciprocal tariffs from March 4th.
To be clear, tariffs are not going away with the tariff rate applied to China expected to be 25%-40% (currently 51.1%).
Source: Polymarket, Chad P. Brown (PIIE), Hedgeye Risk Management
Unsurprisingly, transshipping lines (rerouting exports) have already started to form.
For example, exports from China to the Western world have already started to come off their highs while starting to increase to places like Vietnam, Singapore, and Indonesia.
Source: Customs General Administration PRC, Hedgeye Risk Management
Semiconductor demand continues to see new all time highs especially as supply chains front run tariffs.
Source: Central Bank of the Republic of China (Taiwan), Hedgeye Risk Management
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Policy Impacts:
Tax Cuts, Tariffs, and Stablecoins
Tax Cuts
The CBO baseline projection for debt/deficits as of January 2025, before the OBBB, was for US Government Debt to grow from $28 Trillion in 2025 to $52 Trillion in 2035.
That’s an 85%, or $24 Trillion, increase over the next ten years.
This increase is fueled by annual deficits ranging from $1.7 Trillion to $2.6 Trillion.
In GDP terms, this equates to 5.2% - 6.5% per year.
Recall that “normalcy” is closer to 1%- 2%.
Source: CBO, Hedgeye Risk Management
The OBBB is projected to add a further $3.2 Trillion to the baseline debt by 2035, increasing incremental debt from a $24 Trillion increase to a $27 Trillion increase.
That would roughly double the debt in the next ten years to $55-$56 Trillion from the current $28 Trillion.
Interestingly, the structure of the plan is quite favorable to GDP growth in 2026-2029, but creates much larger deficits/debt as a result.
Source: CBO, Hedgeye Risk Management
2026 and 2027 will see the largest increases in deficits under the OBBB.
The CBO Baseline deficit forecast will rise from 5.5% of GDP to 7.0% in 2026, and from 5.2% to 7.0% in 2027.
While a 1.5% and 1.8% increase may not sound like much, consider that those are, under normal times, are the size of the entire deficit.
Stated differently, those changes will add an additional $479 Billion and $588 Billion in debt in 2026 and 2027, respectively.
Bear in mind, however, that reductions to overall government spending are nonexistent in 2026 and 2027 and de minimis in 2028 and 2029. The real cuts come in 2030-2034.
Source: CBO, Hedgeye Risk Management
Longer term context on government debt levels is worth considering.
To better understand just how high debt levers are, in its first 150 years (1790-1940), the US Debt to GDP never exceeded 45%.
This was despite the Revolutionary War, the American Civil War, and World War 1.
During the World War 2, Debt to GDP briefly spiked from 43% to 112% in 1945 but then rapidly fell back to 45% by 1960.
Source: CBO, Hedgeye Risk Management
Since 1960, the Debt to GDP ratio remained largely contained from 1960-2008.
However, since then the ratio has been on a secular trend of increase despite no major conflicts.
Source: CBO, Hedgeye Risk Management
As such, let us consider the new normal:
Deficits – Highest Since Basically Ever
The forecast deficit levels for 2026-2029 of 7.0%, 7.0%, 7.2% and 6.8% will all be among the largest deficits recorded since 1962.
Only 2008: 9.8%, 2009: 8.7%, 2010: 8.4%, 2020: 14.7%, 2021: 12.1% eclipsed these levels.
In other words, outside of the depths of the global financial crisis and Covid, these next four years will see the (by far) largest deficits posted over the last ~65 years. This is despite near full employment (4.2% U3). Unemployment hit 10% during the GFC and 14.8% during Covid.
Debt – Highest Since WWII And Ready To Eclipse
Unsurprisingly, government debt levels are poised to grow rapidly in the years ahead and will only be hastened along that path under the OBBB. As the previous shown, the United States really is in uncharted territory from the standpoint of its projected debt path. Clearly, something is going to have to give.
Implications
The takeaways here are twofold.
First, and foremost, 2026 will benefit from a GDP standpoint from the tax cuts.
Second, the trajectory of deficits and debt are unsustainable. We’ve said it before, but we’re saying it again. Left alone, this would undoubtedly raise the cost of debt over time. However, government intervention may well lower rates instead, ushering in a period of protracted elevated inflation and negative real rates.
Tax cuts for 2026 are estimated at $480 billion on GDP of $31.3 trillion. This would equate to a boost of +1.53% in growth if those tax cuts were fully spent. That is unlikely, however, as marginal propensity to consume (MPC) falls as income brackets rise.
MPC means what is the likelihood you would spend additional money if you had more money.
Making some rough estimates around share of tax cuts attributable to different income cohorts and associated MPC, we estimate a roughly +60bps lift to growth in 2026 (from 2025) from tax cuts.
*(Assumed Share of Tax Cuts to Low/Mid/High Income: 5%/25%/70% and MPC of 75%/55%/30%, respectively.)
Source: Hedgeye Risk Management
Tariffs and Trade Wars
We are at record levels of Trade Uncertainty.
Unfortunately, the last update to this series is an April print of 7,983.
For context, NAFTA produced a reading of 1,000.
Chinese Tariff wars in the last Trump Administration registered 2,000.
The current reading of almost 8,000 is really the definition of uncharted y-axis territory.
Source: Federal Reserve, Hedgeye Risk Management
With regard to Tariff Shocks, it is less bad than April 2nd (liberation day), but yes they are still 6X what they were last year.
Even taking into account the 90 day pauses and Geneva Deal day with China, the Yale Budget Lab still estimates that post substitution effective US tariff rate is 14.7% which is up from 2.4% in 2024 and 1.5% in 2015.
In other words, this is very likely at or near a floor rate for tariffs looking forward.
Bigger picture, even with pauses in place, the average effective tariff rate is 6x what it was just last year.
Source: Yale Budget Lab, Hedgeye Risk Management
Below are Yale’s Budget Lab estimates of Tariff hits to GDP over the next few years.
The outlook here suggests that peak drag from tariff headwinds will manifest in Q2 2026 and then recede steadily over the following two years, settling out at a long-term -34bps drag to GDP.
Interestingly, their analysis suggests Q3’s drag on growth will be less bad than what was seen in Q2 but that the drag will increase in both Q4 and Q1/Q2 2026.
The table suggests the tariff impacts by sector.
Hardest hit is expected to be Construction and Agriculture.
Most helped is expected to be Durable Manufacturing.
Source: Yale Budget Lab, Hedgeye Risk Management
Ultimately, the long run impacts of higher US tariffs on the RoW will vary.
Both the US and China will be similarly adversely impacted by tariffs with the US suffering a 0.34 point GDP growth headwind while China is expected to suffer a 0.25 point GDP growth headwind.
Most adversely impacted is expected to be Canada, suffering a 1.92 point drag on GDP.
The UK is seen as a relative beneficiary.
RoW is seen as being net neutrally impacted.
Source: Yale Budget Lab, Hedgeye Risk Management
With regards to tariff impacts on prices and labor, the current rates are expected to add 1.5% to price levels and 0.3% to unemployment.
Our baseline expectation for accelerating inflation throughout much of the second half of 2025 would be amplified by Yale’s estimate of a 1.5% increase to prices from tariffs.
The labor market, currently sitting at 4.2% unemployment, would see a +30bps increase to 4.5% as a result of tariff impacts.
Source: Yale Budget Lab, Hedgeye Risk Management
Let us zoom out and measure the real economic impact thus far in the US-China Trade War.
Source: US Census Bureau, Hedgeye Risk Management
Shipping Volumes and Freight Rates are rolling over.
Shipping volumes have somewhat lagged due to front loading, but the -4.8% YoY growth in May shows the clear deceleration.
Freightos (digital freight platform) tracks freight quotes by carriers, freight forwarders, and shippers.
A deceleration in this index tells us that fewer goods are being moved, resulting in less pricing power for carriers.
Source: Port of Los Angeles, Freightos, Hedgeye Risk Management
Stablecoins and the SLR
Let us dive into the wonderful world of digital assets.
Bitcoin’s price and the stablecoin market cap are highly related, historically.
As a reminder, stablecoins represent a significant digital monetary innovation of the 21st century, designed as privately issued, fiat-collateralized redeemable tokens that operate natively on blockchain networks. The most common are USD stablecoins. These tokens can then be moved on a blockchain 24/7/365 for various purposes, including savings, payments, trading, etc.
Additionally, newer users typically need stablecoins to transact in digital assets.
Source: Glassnode, Hedgeye Risk Management
The stablecoin market cap is regularly pushing all time highs, currently sitting around $250 billion, representing more and more USD moving onchain.
Source: Glassnode, DefiLlama, Hedgeye Risk Management
USDT has historically dominated the stablecoin market cap, but over time, the landscape has become more diversified as new incumbents enter the scene such as USDC.
Source: CoinGecko, Hedgeye Risk Management
One of the most important considerations is that stablecoin issuers are buying US Debt.
Tether and Circle, the top 2 stablecoin issuers, would be the 17th largest holder of USTs if ranked amongst the major foreign holders.
Source: US Department of Treasury, Circle, Tether, Hedgeye Risk Management
Moreover, relaxing the Supplementary leverage ratio (SLR) for banks will impact treasury demand.
Expect banks to generally allocate further into USTs due to the SLR rule changes.
If all the freed up capital were to be put to work in USTs, it could amount to trillions in incremental demand.
However, a more likely scenario is that banks allocate the capital relief across a range of options including greater lending activity, capital return to shareholders, and greater purchases/allocations to USTs.
Something like $0.5 trillion to $2 trillion in incremental UST demand could manifest over the next few years as a result of these rule changes.
Source: Hedgeye Risk Management
The greatest impact to the UST market will likely be seen at the front end. As a result, the yield curve will likely steepen.
An estimate of how the SLR changes are likely to impact the various parts of the curve find that UST bills and UST notes would see the largest demand increase, likely lowering yields by 0.15% to 0.25%.
The 3-7 year belly would likely see some benefit, potentially lowering yields by 0.05% to 0.15%.
Long bonds would likely see relatively little benefit, potentially lowering yields by 0% to 0.10%.
This means short rates would fall and the curve would steepen under SLR reform.
Source: Hedgeye Risk Management
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