Macro Fog and Risk Radar: Why Defensive Postures Trump Rate Cut Optimism

European executives are increasingly skittish. For the first time since September 2020, more than half of respondents expect unemployment in their countries to grow over the next six months. This pessimism is acute; the most significant decline in sentiment is among Europeans, who are once again more pessimistic than peers in other regions. More than half of respondents expect unemployment in their countries to grow over the next six months. Respondents in Europe and developing markets are much more likely than they were in June to predict that unemployment will grow. This unease is centered squarely on policy volatility. For the second consecutive quarter, shifts in trade policy have emerged as the most-cited disruption to growth in the global economy, in respondents' home countries, and in their own companies. About six in ten respondents point to changes in trade policy-including tariffs-as one of the greatest risks to global growth. Confidence in navigating this minefield is shockingly low. Just 34 percent feel equipped to manage these trade-related changes. Just 34 percent of respondents say they are confident or very confident in their organization's ability to navigate trade-related changes.

Asia-Pacific, particularly Greater China, shows a different picture. While not immune, executives here demonstrate greater adaptability. Nearly two-thirds of respondents reported their companies made changes to US trade policy at least to some degree, with Greater Chinese firms notably shifting supply chains by sourcing from new suppliers. This operational flexibility contrasts sharply with European despair. Greater China respondents reported alterations to their supply chain, such as purchasing from new sources, as more common than in other regions. The market, meanwhile, is pricing in the unease. While the Equity Market Volatility Tracker (EMVMACROBUS) lacks specific 2025 data points, its established role as a macroeconomic uncertainty indicator reinforces the narrative of growing risk aversion. The Equity Market Volatility Tracker (EMVMACROBUS) serves as a macroeconomic uncertainty indicator. This asymmetry is key: Europe faces the double whammy of external trade shocks and domestic weakness, while Asia-Pacific, despite its own vulnerabilities, appears better positioned to reroute around the obstacles. Investors should prioritize capital preservation in sectors most exposed to the regulatory crosscurrents threatening Europe.

Despite the Federal Reserve's September easing step-a 0.25 percentage point cut to 4.00%-4.25%-the benefits haven't reached the real economy with much force, underscoring a transmission breakdown amplified by regulatory friction. Eleven of twelve FOMC members voted for this incremental move, citing downside risks to employment, yet the pass-through to key consumer borrowing rates remains stubbornly incomplete. Banks are notorious for letting borrowing rates take the elevator up and the stairs down, according to Bankrate analyst Stephen Kates, a dynamic that has left credit card rates stubbornly near 20% despite the Fed's cuts. While the average 30-year mortgage rate did dip to a one-year low of 6.26% by late October, savings yields simultaneously fell, creating a net drag on household finances. This disconnect highlights how monetary policy alone struggles against embedded friction-regulatory uncertainty and bank balance sheet dynamics are holding down the flow of cheaper credit. The FOMC's median projection expects only one more modest rate cut this year, aiming for 3.50%-3.75% by end-2025, but dissent signals deeper concerns. Stephen Miran, a recent appointee, advocated strongly for a larger half-point cut, projecting a more aggressive 2.75%-3.00% path, reflecting worries that headline risks may be underappreciated. Both the Fed and external forecasts like Morningstar acknowledge a growing threat: tariffs and policy uncertainty could push core inflation higher (to 2.6% per the Fed, 3.2% per Morningstar) and unemployment up (to 4.4% vs. 4.7% forecasted), while GDP growth slows (1.6% vs. 1.3%). The Fed's next move in October is widely anticipated to nudge rates lower again, but the limited savings from past cuts-averaging just $126 annually on credit card debt-suggest diminishing returns unless the regulatory overhang eases. The rising specter of flatlining hiring and rising unemployment, coupled with volatile yields reflecting tariff fears and debt worries, means rate cuts alone may prove too blunt an instrument to counteract the real liquidity crunch brewing from compliance and regulatory pressures.

Markets are pricing in a soft landing. The October Fed rate cut is already baked into odds, with traders anticipating a move to levels last seen in late 2022. Yet beneath the surface, executives are painting a far more cautious picture, revealing a significant disconnect between Wall Street optimism and corporate reality.

The Federal Reserve faces mounting pressure to ease, driven by stagnant hiring and rising unemployment fears. Mortgage rates recently hit a one-year low of 6.26%, while new car loan rates have eased modestly. But these moves lag far behind the central bank's benchmark, as banks are notorious for letting borrowing rates take the elevator up and the stairs down, according to Bankrate's Stephen Kates. The average credit card rate, for instance, only fell 0.5 percentage points year-over-year, translating to about $126 in annual savings per household. This delayed pass-through underscores how monetary policy transmission remains fragmented.

Meanwhile, the dominant concern for CEOs isn't inflation or the Fed-it's trade policy. Six in ten respondents point to changes in trade policy-including tariffs-as one of the greatest risks to global growth, per McKinsey's September survey. Confidence in navigating these disruptions is alarmingly low, with only 34% of executives feeling equipped to handle the fallout. Even more striking, this is the second consecutive quarter where trade volatility has eclipsed other threats. Executives are scrambling: nearly two-thirds of companies have altered operations, with Greater China firms pivoting to new suppliers and others conducting scenario planning. Yet, only 15% see trade shifts as a growth opportunity-up from earlier but still a minor fraction.

This pessimism is reflected in portfolios. Our Three Layers of Risk Management framework signals defensive positioning: equities remain underweight despite recent declines, with allocations held back by tariff uncertainty. Fixed income is increasingly viewed as essential 'ballast,' providing stability against equity volatility. Investors are waiting for clarity-not just on trade, but on labor markets. Unemployment expectations have hit a multi-year high, with 53% of executives anticipating growth over the next six months, particularly in Europe and North America.

The contrast is stark. Markets anticipate rate cuts as a cure-all, but executives see them as a band-aid on deeper wounds. Yields have been volatile this fall as investors weigh concerns of a slowing job market along with fears of higher inflation from tariffs. Until trade policy stabilizes and hiring picks up, the defensive posture in portfolios is likely to persist.

Despite clearer signals that central banks are pivoting toward rate cuts (as noted in prior market commentary), the persistent fog surrounding global trade policy remains the dominant near-term threat to portfolio stability. McKinsey's latest survey confirms executives view shifting tariffs as the top economic disruption for the second consecutive quarter, with optimism crumbling across key markets. This environment demands a disciplined, visibility-driven approach to capital allocation. Our Risk Defense framework mandates that positions shrink as meaningful uncertainty emerges, particularly around policy implementation timelines and regional economic fallout.

Consider a portfolio manager reviewing their exposure to mid-cap industrial manufacturers. Initial research identified three names poised to benefit from anticipated infrastructure spending. However, the rollout of new steel tariffs remains stalled in congressional committees, with conflicting signals from both industry lobbyists and administration officials. Orders from key defense contractors have slowed, and shipping cycles for existing contracts have lengthened-classic indicators of buyer hesitation.

Rebalancing actions should follow these thresholds: - Reduce non-core equity positions by 20% if two or more visibility signals (e.g., delayed shipments, policy stalemates) appear across holdings. - Shift capital to short-duration, high-credit-quality bonds if unemployment expectations rise above 50% in any major market (as seen in Europe per Survey 9/2025). - Maintain a cash buffer of 15-20%-replenished only when policy clarity emerges through concrete legislative milestones.

Exit criteria are equally critical: - Full position liquidation if delivery cycles extend beyond 90 days without resolution. - Immediate divestment if compliance costs surpass 10% of projected margins (a threshold already breached in surveyed supply chains). - Re-entry only after seeing three consecutive quarters of normalized trade flows and policy enactment.

This defensive posture aligns with the strategic layer's revised equity expectations, which remain cautious despite late February price declines. Fixed income allocations retain their stabilizing role, but tactical adjustments must precede any equity repositioning-especially while trade policy volatility persists and executive confidence remains below 35%. The next inflection point hinges on whether tariff clarity arrives before year-end; if not, further equity reductions become mandatory under our visibility rules.

The Fed's September easing step-a 0.25 percentage point cut to 4.00%-4.25%-hasn't translated into significant relief for the real economy, underscoring a transmission breakdown. Regulatory friction and embedded uncertainty continue to dampen the flow of cheaper credit, limiting the effectiveness of monetary policy alone.