Week Ahead: Is the World Quietly Quitting America?

The intersection of geopolitics and central bank policy has created a volatile backdrop for global markets. Following a week dominated by headlines surrounding the Trump administration, international deal-making, and market relief rallies, a deeper, more structural trend is emerging. Beyond the immediate noise of diplomatic negotiations, sophisticated investors are beginning to ask a critical question: Is the global financial system beginning a process of "quiet quitting" regarding American assets?

While markets may have reacted positively to short-term resolutions, the medium-to-long-term outlook suggests a potential shift in how global asset managers view the US economy. From the mechanics of labor productivity to the future of the Federal Reserve, the signals point toward significant macroeconomic pivots that may catch the consensus off guard.

Key Takeaways

• Global Reallocation: Asset managers are reconsidering their exposure to US markets, driven by slowing growth and long-term structural concerns rather than immediate retaliation.
• The Dollar Risk: A gradual shift away from US assets could trigger a new downward leg for the US Dollar.
• The Productivity Conundrum: Strong GDP data conflicts with weak employment figures, suggesting an AI-driven productivity spurt that could drive inflation below target.
• Fed Policy Outlook: Despite market hesitation, the fundamental data—specifically disinflation and labor market weakness—supports a case for three rate cuts this year.
• Labor Market Mystery: A massive decline in labor supply (due to deportations) coupled with slowing wage growth indicates underlying economic weakness.

The "Quiet Quitting" of US Assets

Recent geopolitical events have calmed immediate market nerves, but they may have obscured a subtle, long-term shift in capital flows. We are seeing early signs of global asset managers reevaluating the dominance of the United States in their portfolios. This phenomenon can be described as the world "quietly quitting" US assets.

This is not necessarily a belligerent or retaliatory move by foreign powers. Instead, it is a rational reallocation based on relative economic performance. As the US economy shows signs of slowing, pension funds and institutional investors worldwide are questioning whether their heavy allocation to the US remains justified.

The Economic Mechanism

The United States runs a current account deficit, which requires foreign funding. There are two ways to close this deficit:

1. The Positive Path: The US economy becomes more productive and competitive, exporting more goods and services.
2. The Painful Path: Foreign countries withdraw funding, leading to reduced growth and a shrinking of imports.

Current trends suggest we may be risking the latter. If this reallocation gains momentum, it represents a significant headwind for the US Dollar.

"I don't see it at all like a short-term retaliation... it's more a sort of global, gradual, and longer-term move away from US assets which would be negative for the dollar. So we could be about to start another down leg for the dollar."

Geopolitical Fragility

Furthermore, the nature of recent diplomatic resolutions poses a risk to institutional unity, particularly within NATO and the European Union. If European allies feel marginalized by US policy shifts, the long-term cohesion of Western economic institutions could be tested. While markets often celebrate the avoidance of immediate crises, they frequently underestimate the long-tail risks of fractured alliances.

The AI Illusion and the Productivity Paradox

A significant disconnect has emerged in US economic data: Gross Domestic Product (GDP) remains strong, yet employment data appears weak. Historically, when such a conflict arises, the GDP data is often revised downward later. However, there is an alternative explanation: a massive productivity spurt driven by Artificial Intelligence (AI) and capital-intensive infrastructure.

If the US is experiencing a productivity boom—producing more output with fewer hours worked—it creates a dilemma for the Federal Reserve regarding inflation targets.

The Inflation Math

The Federal Reserve generally models a 2% inflation target based on 1.5% labor productivity growth and wage growth roughly consistent with those figures. However, the data has shifted:

• Current Wage Growth: Approximately 3.5%.
• Recent Productivity: Closer to 2.25% over the past three years.

If productivity remains high while wage growth stabilizes at 3.5%, the unit labor cost—the primary driver of inflation in a services economy—is actually rising too slowly to sustain 2% inflation. This suggests the US is at risk of undershooting its inflation target, a disinflationary signal that the market may be ignoring.

The Labor Market Mystery

Perhaps the most confounding aspect of the current economic landscape is the supply and demand dynamic within the US labor market. Administration data suggests a massive reduction in the labor supply, potentially involving the departure of over 2 million individuals due to deportation policies and self-deportation.

The Economic Anomaly: Basic economics dictates that when the supply of labor drastically decreases, the price of labor (wages) should increase. Yet, we are seeing the opposite: wage growth is slowing.

"How can we have a 2 million decline in the working population and we still have slower wage growth? That's amazing. And that's another reason why I think the economy is actually quite weak."

This anomaly supports the bear case for the economy. It suggests that demand for labor has collapsed faster than the supply, indicating a much cooler economic engine than headline GDP figures imply. Furthermore, unemployment duration is rising—a rare occurrence during an economic expansion—suggesting the US has entered a "low fire, low hire" environment.

The Fed Chair and Policy Direction

With the potential nomination of a new Federal Reserve Chair looming, speculation has turned to how leadership changes might alter monetary policy. While names like Kevin Warsh are circulating, the impact of a new Chair may be overstated.

Monetary policy is executed by a committee, not a dictator. The Chair is one of 12 votes. The Federal Reserve has a deeply entrenched tradition of consensus, and any Chair attempting to deviate wildly from the dual mandate of price stability and maximum employment would likely face resistance from the Board of Governors.

The Case for Rate Cuts

Despite some market analysts calling for zero rate cuts this year, the data supports a more dovish trajectory. If one strips away tariff-related noise, market-based PCE inflation is already nearing—or potentially below—the Fed's target.

The Federal Reserve’s credibility relies on its ability to manage inflation in both directions. If inflation significantly undershoots the target because policy remained too tight for too long, the Fed risks losing public support and inviting political attacks on its independence. Consequently, a data-dependent Fed will likely be forced to cut rates to stabilize the economy.

Conclusion

The narrative of US economic exceptionalism is facing credible challenges. From the quiet reallocation of global capital away from the dollar to the mysteries of a shrinking labor force that fails to ignite wage inflation, the signals point toward disinflation and slower growth.

While the consensus view may be shifting toward a "higher for longer" rate environment, the underlying structural data suggests the Federal Reserve will need to act. We maintain a forecast of three rate cuts this year, driven not by optimism, but by the necessity of addressing a cooling economy that is being masked by high-level GDP figures.