US politics driving market volatility

Political developments in the US continue to dominate global markets as investors grapple with policy shifts, particularly around tariffs and trade restrictions. The Trump administration's focus on limiting immigration and raising trade barriers has introduced significant uncertainty, driving inflation expectations higher while dampening real growth and amplifying volatility across asset classes. Our base case scenario for 2025 anticipates 4% nominal growth, comprising 0.5 to 1% real GDP growth and 3% to 3.5% inflation. Tariffs function similarly to a value-added tax, driving near term inflation higher while slowing corporate decision-making and investment timelines.

The probability of a US recession remains modest at approximately 20%, but any downturn would likely differ from past crises. Rather than stemming from asset price collapses or systemic shocks, this would be an inflation-driven slowdown. Elevated prices, leading to constrained consumer spending, will likely reduce real output and put pressure on specific  segments. This scenario would be different than the Global Financial Crisis or the Covid pandemic, which were severe demand destruction downturns. Despite the risks, we anticipate one to two rate cuts in 2025, likely beginning in September.

Front end opportunities

For liquidity-focused investors, the goal is to navigate market turbulence without sacrificing core objectives. We’ve taken advantage of recent yield sell offs in May by extending portfolio duration and targeting high-quality, short-dated instruments. Current opportunities include 6-month European and Asian bank commercial paper and certificates of deposit yielding 4.50%-4.60%, as well as 2-year bank paper callable in 1 year at up to 4.75%. Our strategy prioritises liquidity, manages credit risk, and seeks durable yield even if rate cuts are delayed.

Similar to the Federal Reserve, the European Central Bank and the Bank of England are similarly balancing domestic inflation with external risks. All three are currently priced by the market for two cuts by year-end, though we lean slightly more hawkish. In such an uncertain environment, central banks will likely delay action until clearer signals emerge. For UK investors, persistent inflation and a measured easing cycle may present relative value opportunities.

Currency dynamics and USD liquidity strength

Debate around 'US exceptionalism' has resurfaced amid reversals in tech stock valuations and currency strength. Still, the US dollar remains structurally strong, especially in short-term markets where Treasury bills and short-dated Treasuries continue to offer deep, reliable liquidity. Although modest outflows from USD money market funds have been observed, they appear rate-sensitive rather than indicative of a strategic shift. For now, de-dollarisation trends remain selective and tactical.

Portfolio implications for liquidity investors

For liquidity investors, the path forward calls for disciplined flexibility. With elevated volatility and increasingly data-driven central bank decisions, portfolios should emphasise high-quality, short-duration assets that provide both resilience and tactical yield. Strategic allocation to laddered maturities, including overnight and short-dated instruments, can help ensure daily liquidity while capturing yield opportunities. In a world where policy clarity is limited but dislocation breeds value, active management remains essential for navigating evolving risks and preserving capital.

Source for all data is Bloomberg, J.P. Morgan Asset Management, as at June 3 2025.