Macro Pulse Episode 20

Hello and welcome to Macro Pulse. Over the last few months we saw market volatility dropped. But as Europeans are getting back from the holidays, we now think that volatility will rise over the rest of the year. And there are some events out today that can still alter market dynamics. First of all, on Friday we will have the nonfarm payrolls report.

And after last month’s very weak number and a revision made to prior months, the market will be keen to focus to see how weak the labor market really is and if that entails the fed potentially having to cut rates more than currently anticipated. We’ll also get the South African Reserve Bank on the 18th of September. Market is not expecting any moves or any rate cuts from that meeting because, as you saw recently, inflation started to rise.

But the rate that rise has been more due to an increase in utility and also food prices. In our view, we saw that food prices could be peaking soon as the supply of meat and vegetables are improving, and that should set the stage for inflation to potentially start falling again into next year and providing scope for the central bank to cut rates to below 6% over the next 18 months.

Then we also have the Bank of England on the same day. Now inflation has also been rising in the UK, which means that the central bank will likely hold off on moving rates down, and that is by the very weak economic backdrop. And if we look at the policy set up, monetary policy with interest rates at 4% remains tight.

And on the fiscal side, we will have the autumn budget, at the end of October. And from that budget, we could potentially see further tightening of conditions as well. As the Chancellor is looking at potentially, raising taxes to cut some spending. Other central bank meetings is that of the European Central Bank, on the 11th of September. And for the ECB, we could say that they are done cutting interest rates. We’ll have to see where inflation ultimately settles. But it does look like with inflation now at below or at 2%, that inflation will be sitting around these ranges. And economic activity seems to be steadily rising. So a lot of central bank action. So happening this month.

If we then go on to geopolitics and politics, next week on the 8th of September will have a vote of no confidence in the French Prime Minister, Francois Barrow. He proposed a budget, which he failed to pass. The reason for that is because it’s entails some spending cuts. Which is unpopular. It includes, for instance, you know, scrapping to public holidays and also scrapping, public hiring.

And so the real emphasis to try and reduce the budget deficit is failing. And that is putting pressure on the fiscus, in France. And we saw, you know, French government bond yields starting to rise now to a level similar to that of Italy. Then if we go to other meetings that we still waiting for, is the meeting between Putin, Zelinski and Trump to reach some sort of a peace deal, although we think the ultimate outcome would be that of a ceasefire, given the fact that the parties are so far away in terms of, security guarantees and land.

And so if we do get a meeting in the next few months, though, you know, it may rather be that we get a ceasefire, then we also look still at a meeting between Jinping and Trump to come out potentially in November or October of this year. And the market is expecting some sort of, an attempt to reach a trade deal between China and the US.

And so the markets will be keen to focus on that as well. Then in China itself, we’ll have the Chinese Communist Party having the fourth penalty session. And with that, the next five year plan. So proposals for growth, economic growth between 2026 and 2030 will be discussed at this meeting, which will also be, around about the end of October.

What we will be watching from that meeting is any allusion to potential further, easing measures, but also, more details around the anti involution campaign. Now, the anti involution campaign is really a campaign to try and reduce excessive competition and reduce capacity, in the economy over capacity in the economy and in that way also try to stimulate, domestic demand and increase corporate profits.

So a key event to watch as well. So as you can see, a lot of events still on the calendar. But let’s look at some more recent events and the impact of those. So if you remember in May the International Court of Trade, decided that Trump’s tariffs is reciprocal tariffs. They ruled that those are unlawful and that the president doesn’t have unilateral authority to impose tariffs on all countries around the world.

Well, that, ruling was appealed. And the appeals court in the US has decided last week that. Yes, they also deemed that the, emergency tariffs that Trump imposed, is unlawful. However, it delayed its implementation of its ruling until the 14th of October to give the president and the government a chance to appeal that at this US Supreme Court.

And so the Supreme Court now has to decide to take on this case or not. And if they do take on this case, it could mean that we could get a ruling and sometime in the middle of next year. Regardless, given the fact that the Supreme Court has got a six out of nine conservative bias, it’s very likely that the ruling would be in favor of the president, and that the tariffs would remain in place.

And even if they do rule against the president, there are many other avenues that the Trump administration can look at to stall, impose tariffs on countries around the world. The other big news has been a growing concern of fed independence and that fed independence are being compromised. So last week, Lisa Cook, who is a Federal Reserve board, governor, was fired by President Trump, due to allegations of mortgage fraud.

But what is really behind this is an attempt by the Trump administration to get influence on the board of governors. Now, the board of governors consists of seven members, and, two of them has been appointed by Trump during his first term. In effect, three has been appointed by Trump during his first term, the one being, Jerome Powell.

The other two has recently voted in favor of rate cuts. So one can assume that these, are more aligned towards Trump’s view. Apart from these two seats, more recently, Adriana Kugler was as resigned, and her position has now been filled by one of Trump’s economic advisers, Stephen Marron. So with three seats, and potentially being able to take Lisa Cook’s seat, as she been fired, Trump could end up having four seats, or having influence over four seats at the board of governors.

Now. That means a majority out of seven. And it’s really the board of governors that also appoints the regional fed presidents. And that election comes up in February next year. And so the ultimate aim is here to increase influence, over the fed. Now the markets are becoming concerned about this. And you can see that. And also the way that the gold price has risen more recently.

So there are two things that stand out for me in terms of market dynamics. More recently, the fact that the gold prices, broken out of its most recent range, we saw gold price rise to 3500 again, as people become concerned about, not only, you know, fed independence, but also fiscal concerns. I’ve mentioned, the situation in France and in the UK at the moment, and central banks continue to diversify away from the US dollar, into into other assets, including gold bond yields have also not being the safe haven as it’s supposed to be.

And that has been the second thing that stood out for me is that we see a continuous rise in bond yields and in particular long bond yields. So we do use steepening in the curve with short bond yields coming down. But as really the long bond yields the 30 year bond yields that’s rising across the world. And the reasons for that is yes concerns around potentially inflation.

As also concerns around fiscal dynamics. And the fact that they are acting as a safe haven just hasn’t played out the way, it’s supposed to. There’s also still increased issuance and supply, from many developed market economies, and the demand just isn’t there to take up that supply now. For now, the equity markets have, somewhat ignored this dynamic.

But if we are seeing a weaker economic backdrop with continued rise in bond yields, at some point the equity market will take heed of these signals. And may have to, to price in these additional risks. That’s all for this week. Thank you.