LIVE MARKETS-TD Securities: Resilient but two-speed

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TD SECURITIES: TWO-SPEED ECONOMY

With the last month of 2025 upon us, James Rossiter at TD Securities is eyeing a resilient 2026 with global growth easing slightly to 2.8% from 3% in 2025. TD's head of global macro strategy cites support from private sector balance sheets, cooling inflation and robust consumption with relatively easy financial conditions and AI investments.

But looking under the hood in the U.S. he sees some cracks.

After the trade policy confusion jitters of 2025, the strategist is looking for stabilization in 2026 as he sees President Trump formalizing trade deals with key partners.

While projecting a "below-trend expansion" for Q4 2025 and Q1 2026, Rossiter sees a gradual return to potential output, estimated at 2.3%, for the rest of 2026 due to "less restrictive monetary policy and improving labor market conditions."

The strategist is forecasting GDP growth of 2.1% from Q4/Q4 in 2026 and inflation "on a gradual march higher as tariff passthrough continues to materialize, peaking at around 3.1% in 26Q2."

More modest than expected pass-throughs in 2025 will bring tariff-led spillovers in the first half, according to Rossiter who sees risks "to the upside for inflation as US businesses have continued to absorb most of the tariff shock." However, he sees inflation normalizing later in 2026.

He sees services inflation likely shifting lower and "normalization in housing prices" as key factors.

Even so, 2026 inflation will end above the 2% objective for a fifth consecutive year, with the TD forecast for headline CPI at 2.5% for Q4/Q4 and 2.6% for core CPI, he writes.

After a "close call" December decision by the Federal Reserve, he expects a "more gradual pace of easing toward 3% in 2026."

"Absent a sudden deterioration in labor market conditions, the risk is that the Fed turns more cautious around the pace of rate cuts as it scrutinizes in real-time how tight policy is," Rossiter said.

Other risks he cites are a falling labor supply due to immigration constraints and the potential for AI investment becoming a marginal drag "if the recent eye-popping ramp up is not sustained."

Rossiter forecasts unemployment rising to 4.6% by Q1 before dropping to 4.3% by year-end.

And he sees the "two-speed, K-shaped US economy" continuing with "middle- and low-income consumers still struggling" as real incomes take a hit from rising inflation and normalizing nominal wage growth.

But, top earners "will likely continue buttressing spending at the aggregate level," with the top 40% of earners accounting for "close to 60% of total consumer spending."

While balance sheets are still stellar, Rossiter says " credit card delinquencies (both for 30+ and 90+ days) have stayed elevated."

And with student loan delinquencies picking up "quite rapidly" in 2025, this is another indication of the bifurcation of the consumer as "the transition into serious delinquency this year has been led by the younger cohort, which is currently the most exposed to the cyclical cooling of the labor market."

(Sinéad Carew)

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