No US recession priced in yet: UniSuper

UniSuper head of fixed interest David Colosimo said while US President Donald Trump's tariffs have caused a great deal of uncertainty, a recession in the US may not be on the cards - yet.

"I think in the immediate aftermath of the tariff announcement, there did become a general consensus that the magnitude of the tariffs would be enough to send the US economy into recession," Colosimo said.

"Since then, we've seen a lot of those tariffs walked back. Aside from China, the retaliatory tariffs are on a 90-day pause. There's been some exemptions for a lot of goods from China as well. But even if he turned around tomorrow and cancelled all tariffs, it's still not clear that the damage can be undone.

"I think the prospect of a recession will probably stay with us until proven otherwise, and so there's a lot of uncertainty."

Colosimo said it's not just consumers that are nervous about the potential uplift in inflation due to the tariffs, companies are also scaling back their capital investment plans.

"We're seeing anecdotes that shipping between the US and China is on hold. That could cause product shortages in the US. We're seeing international tourists seem to be avoiding the US now as well," he said.

"But ... I don't think the current market is actually priced for a recession. The PE ratio is still at quite a historically high level."

Colosimo added that the tariffs also had a surprising impact on bond markets, as investors saw both the share market and bond market falling at the same time.

"Bonds often have a negative correlation to shares. When share prices fall, bond yields also fall, which means that their prices are rising. That's certainly what happened initially after the tariff announcement. But after a few days, that relationship really broke down," he said.

"Shares were still falling but bond yields suddenly changed direction and increased by 0.5% in a single week. That's the biggest weekly increase in more than 20 years, and it's equivalent to about a 4% fall in the price of a 10-year bond. The correlation went positive-shares and bonds were both falling at the same time."

Colosimo said while investors don't know the reason this happened, he believes it could be to do with hedge fund activity during the period.

"There was some initial speculation that it might have even been the Chinese government selling down - they are the second biggest holders of US debt after Japan. While we can't rule that out, I actually think the big part of the move was more likely the type of trading activity you'd see in hedge funds," he said.

"When you look at the interaction between bonds and derivative markets, it looked like a lot of holders who had borrowed money to buy the bonds had to quickly close out those positions, and so all at once, everyone's trying to reduce risk - they're selling bonds.

"The reason why I raise these bond moves, though, is that it really seemed to spook the Trump administration.

"I actually think it was the instability in the bond market that made him re-evaluate his tariff policy this month."