This week’s economic releases have once again underscored the policy dynamics we outlined in our January outlook. President Trump faces a high-stakes midterm election in November, and the incentives are clear: deliver visible growth, moderating inflation, and lower borrowing costs to strengthen the administration’s hand with voters. The playbook echoes the Nixon era of 1972—fiscal stimulus, pressure on the central bank, and short-term accommodation ahead of the ballot box—only this time amplified by the scale of today’s deficits and the structural shifts underway in the economy. In our view, 2026 remains a year of tactical risk-on conditions driven by this “pump now, pay later” environment, even as the longer-term costs of expanded deficits begin to loom.
Thursday’s CPI report provided the most immediate headline. Headline prices rose just 0.2 percent month-over-month, pulling the year-over-year rate down to 2.4 percent from 2.7 percent, while core CPI held at 2.5 percent. On the surface, this is the kind of disinflationary relief that markets have been hoping for. Yet the moderation owes much to lagged effects in rent and energy, along with a temporary assist from AI-driven productivity gains that are dampening certain price pressures. In our view, this relief is likely to prove fleeting. The One Big Beautiful Bill’s tax cuts, bonus depreciation provisions, and the anticipated second-quarter reconciliation measures (including tariff dividends and additional incentives) will inject fresh fiscal stimulus into an already elevated deficit trajectory. As Washington continues to prioritize near-term growth over long-term restraint, we expect pricing pressures to reassert themselves later in the year—precisely the outcome that has historically rewarded hard assets and international diversification.
The employment data told a similarly nuanced story. Nonfarm payrolls rose 130,000 in January, beating subdued expectations, while the unemployment rate edged lower to 4.3 percent and labor-force participation improved modestly. Average hourly earnings advanced a moderate 0.4 percent. These figures suggest resilience, yet beneath the surface lies a dynamic we have highlighted for some time: AI diffusion is contributing to a jobless recovery flavor in the labor market. Headline job gains are being supported by government spending and lower-wage sectors, but broad-based hiring in middle-skill roles remains subdued. This pattern—solid top-line numbers alongside persistent affordability challenges for many households—reinforces the case for additional policy support. The administration has every reason to keep the fiscal taps open and to encourage further monetary accommodation, even if Chairman Powell remains measured in the near term.
On the demand side, the picture was softer, underscoring the need for that next round of stimulus. December retail sales were essentially flat, the control group missed forecasts, existing home sales declined sharply, and mortgage applications slipped. Business inventories also grew more slowly than anticipated. These readings highlight that the initial impulse from last year’s tax legislation is beginning to fade, leaving households and businesses in need of fresh support to sustain the expansion through the election cycle. In short, the data this week painted a picture of an economy that is growing fast enough to avoid outright weakness but soft enough to justify continued policy easing—exactly the environment the political calendar demands.
Markets reflected this backdrop with their usual mix of resilience and rotation. The broader risk-asset trend remains constructive, yet we saw a pointed reminder of volatility in the names most tied to the AI narrative. Several high-profile technology and software stocks came under pressure amid concerns over valuations, the pace of capital-expenditure returns, and the realization that productivity gains may take longer to flow through to earnings than the most optimistic forecasts suggested. The Nasdaq pulled back noticeably, illustrating that the path higher is seldom linear and that crowded growth trades can experience sharp corrections. In our experience, these episodes create opportunities for patient investors to reallocate toward higher-conviction areas—hard assets, international equities, and domestic value sectors—that stand to benefit from deregulation, reshoring incentives, and the ongoing fiscal impulse.
At Euro Pacific Asset Management, our positioning remains aligned with this regime. We continue to view gold and precious metals as essential stores of value in an era of chronic deficits and monetary accommodation. International and emerging-market equities offer exposure to the global spread of productivity gains without the extreme concentration risks evident in the U.S. mega-cap complex. We are not suggesting a straight-line advance; the elevated level of bullish positioning across both retail and professional investors points to the potential for sharp, headline-grabbing setbacks. But the structural forces—political necessity, sustained fiscal spending, and a Federal Reserve that ultimately must accommodate Treasury-market realities—remain supportive through at least the November elections.
In summary, this week’s data reinforced the sweet spot the administration requires: growth that is visible and positive, inflation that is trending in the right direction for now, and enough softness in housing and retail to warrant further policy help. For investors, the medium-term path for the assets we emphasize remains higher, supported by the policy tailwinds in place until the midterms pass. The journey, however, will include the kind of volatility we witnessed this week in the AI complex. We encourage clients to view such dips as opportunities to add exposure and to remain diversified across currencies, real assets and equities.
Disclosure: Any tax or legal information provided is merely a summary of our understanding and interpretation of some of the current income tax regulations and it is not exhaustive. Investors must consult their tax advisor or legal counsel for advice and information concerning their particular situation. Neither the Funds nor any of its representatives may give legal or tax advice.
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