U.S. policies—both foreign and domestic—dominated headlines throughout January. These included tariff threats, rising tensions in the Middle East, Latin America, and Europe, as well as directives aimed at addressing U.S. voters’ cost-of-living concerns. Despite a hectic month, markets seem to be sticking to the “Keep Calm and Carry On” mantra. Meanwhile, China’s achievement of its 2025 growth target of 5% likely understates the macroeconomic challenges ahead. Japan’s Prime Minister Sanae Takaichi has called for general elections for the lower house on February 8, riding a wave of voter popularity. However, her tax-cut plans to tackle affordability are raising concerns from the bond market.

The three limiters to tariffs

The Trump administration has had a busy start to the year. It captured the Venezuelan president, threatened actions in response to the Iranian government’s violence toward protesters, and clashed with European allies over control of Greenland, a Danish territory. During these events, U.S. President Trump announced tariffs on several occasions:

• First, a 25% tariff against “any market” that trades with Iran.
• Second, a 10% tariff on eight European economies until a deal is reached for the “complete and total purchase of Greenland.” This was later dropped after U.S. President Trump claimed to have reached a framework with NATO.
• Third, a 100% tariff against Canada if it seals a trade deal with China.

Markets greeted these tariff announcements with little reaction. We see three limiters that constrain the president’s ability to follow through on these threats, making them useful primarily as negotiation tactics to focus trade partners’ attention—similar to the 100% tariff against China ahead of the summit in South Korea between Presidents Trump and Xi.

First, these tariffs are most likely grounded in authority allegedly provided under the International Emergency Economic Powers Act (IEEPA). However, the U.S. Supreme Court is expected to deliver its judgment in the coming weeks on whether import taxes are covered under this act. A ruling against the administration could undermine an important tool for the president to pursue his foreign policy.

Second, U.S. voters are concerned about affordability and the rising cost of living. Even though the full impact of tariffs has yet to be reflected in inflation data, headlines about higher tariffs could still fuel inflation expectations. The midterm elections are scheduled for November 3, and the incumbent party has maintained its majority only twice during midterms since the Second World War. The Republican Party is therefore fighting an uphill battle given historical precedents and needs to address as many voter concerns as possible. This could keep actual tariff increases at bay. In fact, the administration has already suspended or delayed tariffs on select foodstuffs and furniture in 4Q 2025 to ease inflationary pressure.

Third, the market itself. Financial-market performance plays a key role in shaping voter sentiment, and the administration views it as an influential indicator of how well its policies are being received. Hence, aggressive tariffs—mirroring “Liberation Day” last April—could trigger a sharp stock market correction and a spike in government bond yields. This could constrain the transition from tariff announcements to implementation. Since markets are aware of their influence, this likely explains the muted reaction to U.S. President Trump’s announcements.

This does not mean future tariff announcements should be ignored, but rather that they should be judged against these three limiters to assess their potential impact on the economy and markets.

Federal Reserve independence

The recurring question of Federal Reserve (Fed) independence has returned, especially after the Department of Justice investigated the Fed and its chair for misleading Congress. Kevin Warsh has been nominated as the next Fed chair, and he is considered an experienced central bank official with a preference for a smaller Fed balance sheet and a more focused operation on monetary policy. Historically, he was also seen as a more hawkish member, often arguing for the need to stay on top of price risks. He has recently argued for lowering rates due to productivity-suppressing price rises. We could therefore see the committee adopt a more dovish tilt. However, the committee—which consists of seven Fed governors (including the chair) and five regional Fed presidents—is still expected to make an independent assessment of the economy and decide on its votes. The divided voting pattern in the December Federal Open Market Committee (FOMC) meeting (1 vote for a 50 basis points (bps) cut, 2 votes for no cut, 9 votes for a 25 bps cut) illustrates the committee’s independence. Finally, the current term schedules of these officials mean personnel changes in 2026 and 2027 are likely to be very limited, constraining the administration’s ability to install more doves on the committee.

China and Japan: Creative solutions needed

China’s 2025 GDP (gross domestic product) growth of 5% was impressive given the global backdrop of trade tensions and tariffs. In fact, exports made the difference in supporting growth while consumption and investment remained relatively soft. The ongoing housing-market correction and slow job growth mean both consumers and businesses remain cautious. Fiscal support helped boost home-appliance sales, but that momentum quickly faded with the end of subsidy programs.

In the new year, China will likely still rely on fiscal support to aid consumption and investment. Yet Beijing will need more creative solutions to address the fundamental drags on growth—namely, the housing market and soft domestic demand. While China may not return to the days when real estate drove a sizable share of economic growth, reviving market sentiment could support growth in both construction investment and housing-related consumer spending.

The 15th Five-Year Plan could focus more on advanced manufacturing. Translating this into new jobs will require additional work. We remain optimistic about China’s artificial intelligence (AI) development in the medium term; again, ensuring this benefits the broader economy will likely require targeted policy intervention.

For Japan, Prime Minister Takaichi is enjoying high poll ratings and aims to translate this into an election victory to return the Liberal Democratic Party (LDP) to a majority in the Lower House. To boost her party’s chances, she has pledged a two-year sales-tax break on food, estimated to cost JPY 5 trillion a year, or 0.8% of GDP. This fiscal expansion worries the bond market, as the prime minister was not immediately clear about how the tax break would be funded.

As argued in our 2026 Market Outlook, investors should pay particular attention to developed market government bonds based on each government’s fiscal discipline. Japanese government bond yields rose on the back of the election news, as investors see that an LDP victory could lead to more expansionary fiscal policy and further deterioration in the country’s fiscal sustainability.

Hence, in addition to policies to improve affordability, the government will need to find ways to boost economic growth to raise revenue and reduce social spending. Given Japan’s demographic structure, capex is the most likely route to raising productivity and growth. A return to LDP rule—and thus political stability—could incentivize local companies to invest again.

What does all this mean for investors?

Despite a very noisy January, investors have stayed calm. The MSCI World Index is up 2.2%. The MSCI Asia ex-Japan Index is up 8.2%, with South Korea and Taiwan off to particularly strong starts. The 10-year U.S. Treasury yield is up 9 bps. Gold, arguably more reflective of geopolitical shifts, breached another all-time high.

We see the market calm as justified. As noted earlier, if U.S. President Trump’s tariff threats are unlikely to be followed through, investors should remain focused on the macroeconomy and corporate earnings—both of which are still in good shape. The Atlanta Fed GDPNow nowcast puts real GDP growth at 5.4%, the highest since mid-2023. Fourth-quarter earnings reports so far reflect healthy profit growth and solid outlooks from CEOs and CFOs.

Hence, our overall view on asset allocation remains unchanged one month into the new year. To recap, you can find our 2026 Market Outlook here.

Global economy

• The FOMC held rates at 4.25-4.50% in January after three consecutive cuts in 2025. Fed Chair Jerome Powell emphasized there is no urgency for further adjustments, stating that policy could remain restrictive if the economy stays strong and inflation remains elevated. Policymakers seek progress on 12-month core inflation, currently at 2.8% year-over-year (y/y) in December. However, elevated consumer price index (CPI) data suggests caution. Upside inflation risks persist from potential trade policy changes, immigration policy shifts, geopolitical disruptions, and robust consumer spending. Further rate cuts depend on sustained inflation progress.
  (GTMA P. 25, 27, 28)
• China's economy showed continued weakness, with 4Q 2025 GDP growth slowing to 4.5% y/y, marking the third consecutive quarter of deceleration. The economy exhibits a stark divergence: external strength versus internal weakness. Exports remained resilient, rising 5.5% in 2025 with a USD 1.2trillion trade surplus, driven by efficient manufacturing, competitive costs, and strong performance in high-tech products, automobiles, and integrated circuits. This offset a 26.4% decline in U.S. exports following Liberation Day tariffs.
  (GTMA P. 4, 5, 6, 7)
• The Bank of Japan (BoJ) held its policy rate steady at 0.75% in January 2026 after a December hike, with one dissenting vote from board member Takata Hajime, who favored raising rates to 1.00%, citing achieved price stability and upside inflation risks. The BoJ maintained its forward guidance to "continue to raise the policy interest rate" as economic conditions improve, though it provided no timeline or terminal rate target.
  (GTMA P. 16, 17)

Equities

• Global equity markets posted gains in January, with non-U.S. markets outperforming as investors embraced global diversification. Concentration risks in U.S. equities and uncertainty surrounding the execution of substantial capital expenditure programs weighed on investor sentiment. Asia emerged as the standout performer, with the Asia Pacific ex-Japan Index surging 7.6%. Asian markets benefited from China's revaluation and the technology sector dominance of South Korea and Taiwan, with the KOSPI Composite Index delivering an impressive 24.0% return for the month.
  (GTMA P. 30, 31)
• Equity valuations remain above long-run averages. The forward price-to-earnings (P/E) ratio for the S&P 500 was 22.0x, MSCI Europe at 15.4x, and MSCI Japan at 16.6x.
  (GTMA P. 33)

Fixed income

• U.S. Treasury yields rose across the curve over the month, with most notably the 10-year up 9bps to 4.26%, as uncertainty over geopolitics, Fed independence, resilient economic activity data, and the nomination of Warsh were all unfavorable to long-end yields. Yields on Japanese government bonds rose drastically, with the 10-year up 17bps to 2.23% as fiscal concerns rose over Takaichi’s plans to reduce consumption tax rates on food.
  (GTMA P. 56, 57, 61)
• Spreads on both investment-grade and high-yield bonds narrowed further as fundamentals remain resilient and inflows on demand remain strong, with global investment-grade and high-yield bonds returning 0.9% and 1.0%, respectively.
  (GTMA P. 63, 64, 65)

Other financial assets

• Due to escalating geopolitical tensions and supply disruptions, WTI crude oil rose by 13.8% per barrel. Copper gained 6.9%, but the big mover was silver, which rose 43.3% in January, supported by supply constraints, surpassing the 14.1% rise in gold prices. Both gold and silver reached new record highs before experiencing a sharp sell-off.
  (GTMA P. 74, 75, 76)
• The U.S. dollar DXY index dropped 1.4% in January, as geopolitical developments remain a key concern. Most Asian currencies rose against the U.S. dollar, with the Australian dollar the strongest pair, up 5.1% as markets price in a near-term hike, and the Indian rupee the weakest pair, down 2.3% amid ongoing capital outflows.
  (GTMA P. 71)

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