Macro Pulse Episode 13

But why did Trump pause and reverse this policy? We believe that he was for ultimately forced by the market. And given the fact that more than 50 countries has come out to say they want to renegotiate terms, he could use that as some sort of a victory. Just before his announcement, the market was down in The US by about 20%, so close to bear market territory as the market was starting to price in some form of recession. And most concerning and interestingly was that bond yields were actually rising and the US dollar were weakening while you had the sell off in The US equity market.

Typically, in a big sell off, you would get bonds and the US dollar to act as a safe haven. So you would see bond yields fall and the US dollar rise. So why did that not happen this time around? We believe there are a few reasons for that, and that has got some implications for The US. First of all, the bond seller that we saw was mostly mostly result of some forced selling as hedge funds in particular had to raise some cash, but also we believe that there’s some foreign reserve managers out there that was selling US treasuries, in particular the Chinese or the Japanese.

So reserve managers typically buys treasuries or US dollar assets. But when you see some of that trust being broken and The US is the ultimate cause of policy uncertainty, you would expect that some of the decisions taken by these reserve managers is to diversify away from US assets into other asset classes. So in this environment, it’s no coincidence that the gold did well and the euro actually appreciated very strongly while we had this risk of event. So one could say that, yes, US exceptionalism has indeed peaked. Looking forward, we believe there’s still a lot of uncertainty out there.

We are still faced with the fact that these tariffs could be implemented in the next ninety days. The negative impact of the 10% across the board still have to be felt by the market, and there’s threats of new tariffs, tariffs in particular on semiconductors as well as on pharma. And then we still have to see the fallout of all the retaliatory tariffs and responses from different countries, including China. So in this environment, we think that the biggest macro risk remains stagflation, and the Fed and Powell does agree with us. If you listen to what Powell has recently said, he’s in no hurry to cut interest rates.

There’s too much uncertainty still out there. If you think about the inflation dynamics, yes, inflation at the moment in The US is still coming down, but looking forward, we believe that the tariff rate the effective tariff rate, which has now risen by between 15 to 20%, will ultimately push CPI to well above 3% potentially. And we still think that we’ll be faced with a US recession. So in this environment, we think that the Fed will wait until US economic data, in particular labor data, starts to weaken quite significantly before the act. And then they ultimately may act and cut more than the market is pricing in at this stage, and the market is pricing in about four cuts over the next twelve months.

The country hit the hardest by the trade war thus far is China. They’re facing a 45% tariff rate at the moment because they initially retaliated against The US. But But unlike The US, China has got some fiscal and monetary scope to ease policy while in The US there are some fiscal and inflation dynamics that may keep The US from easing immediately. Also, if we look at the data, China is doing fairly well. They’re growing at 5.4% in the first quarter of this year and year over year, retail sales, industrial production, and fixed asset investment is actually doing fine.

The exports has also remained quite strong given the fact that they front loaded a lot of the exports in the run up to these tariffs. So looking forward, we still think that China has got the ability to absorb some of the pain via currency depreciation, policy easing, which they can bring in, and also looking for new markets around the world which they’re actively doing. We ultimately think that China has got the ability to take short term pain to gain long term strategic advantage and that ultimately may force The US to some sort of a deal with the Chinese in the future For other emerging markets, we also think that the turmoil that we’re seeing at the moment has provided some benefits in the form of lower oil prices as the market is pricing in lower growth, but also opaque cuts are coming through. That ultimately may mean that we will see lower inflation, some ease for the consumer, and it may provide some scope for central banks to cut interest rates. Also, the weaker dollar is positive for commodities, which many emerging markets are producing and exporting.

So for countries like South Africa, where the SARP has been very cautious in thinking or alluding to any monetary policy easing, we think ultimately there’s still scope and room for the SARP to cut rates in the future. Remember, volatility breeds opportunity. Stay focused on the macro. Thanks for watching.