Whatever else happened in markets last week — and there was plenty — it was all overshadowed by a single event on Friday afternoon. The US Supreme Court, in a 6–3 ruling, struck down the bulk of President Trump's emergency tariffs, finding that IEEPA does not authorise the President to impose import duties. Trump immediately announced a replacement 15% global levy under Section 122 of the Trade Act, though that mechanism carries a 150-day time limit. It is a landmark constitutional moment, and markets are still digesting what comes next.

The initial reaction was predictably messy. US equities rallied, the S&P 500 gained 0.7% and the Nasdaq 0.9%, but the move was tentative, partly because investors had been positioning for the ruling and partly because the replacement tariff blunted the relief.The bigger tremor was in bonds and currency markets as markets priced in the fiscal hole left by roughly $140 billion in annual tariff revenue now under legal challenge which is putting upwards pressure on yields and downwards pressure on the US Dollar. The dollar finished the session lower, extending what the BofA Fund Manager Survey earlier in the week flagged as the most negative USD positioning since 2012.

Prior to Friday's bombshell, it had already been a consequential week for data. US fourth-quarter GDP came in at just 1.4%, well below the 2.8% consensus, dragged lower by the government shutdown. Core PCE climbed back to 3%, a reminder the inflation fight is far from over. Strip out AI-related capital expenditure and the underlying economy is showing fatigue. Flash PMIs globally were more encouraging, all major economies above 50, even German manufacturing, but the US picture remains equivocal.

Bond markets had been the quiet beneficiary of this softening backdrop. The two-year Treasury yield was sitting near 3.4%, its lowest since mid-2022, supported by the cooler January CPI and a Fed content to sit on its hands. The tariff ruling adds a new wrinkle: removing tariffs is disinflationary and supports easing, but the fiscal shortfall may require more Treasury issuance, putting upward pressure on longer-dated yields. That tension, compounded by oil prices surging on the largest US military buildup in the Middle East since Iraq 2003, played out in real time on Friday.

The rotation trade continued to assert itself. European equities extended their outperformance, buoyed by improving capital flows, while Japan, Thailand, and Hong Kong all posted solid gains month-to-date. Closer to home, Australian unemployment held steady at 4.1% and RBA minutes confirmed the board had considered holding rather than hiking, a signal the tightening cycle may be nearing its end.

This rotation theme connects directly to the work we have been doing with Andrew Hunt of Hunt Economics, whose latest research highlights the fragility of capital flows into the US. Hunt's analysis points to Chinese companies repatriating export receipts to meet domestic cash-flow pressures, Japanese investors being drawn home by rising JGB yields, and European institutions pulling back from US private credit. That last point found a real-world echo this week when Blue Owl Capital restricted withdrawals from one of its private credit funds, a small but telling sign of the stress Hunt has been warning about. With the US corporate sector cashflow-negative and increasingly reliant on private credit markets that may themselves be contracting, Hunt draws uncomfortable parallels with the early-stage plumbing problems of 2006. Our fuller discussion with Andrew, covering the implications for asset allocation and the case for leaning into the rotation trade, forms the basis of this edition's What We Are Working On segment.