Macro Pulse Episode 38

Hello and welcome to Macro Pulse. Markets continue to benefit from the improving macro drivers out there: the US economy remains fairly resilient, the AI cycle continues to power markets, and energy costs remain within a manageable range. But there are some signs of risks building, which we will explore today.

Let’s start with the US economic data. Retail sales for July came in at -0.6% month-on-month, well below market expectations, and the retail sales control group, which feeds straight into GDP, also came in weaker than forecast. Job growth has slowed over the last few months, and we also see that consumer confidence is drifting lower. On the inflation front there’s a bit more encouraging news: core CPI eased to 2.5%, and headline inflation also fell enough to reduce the potential for future Fed rate hikes. So we clearly see some signs that the US economy is slowing, but no signs that it’s falling into recession.

The US economy therefore remains in a sweet spot: growth is holding up but isn’t running too hot, which means the Fed may not be in a hurry to hike rates anytime soon. And while the consumer data is slowing, the AI economy remains strong, which is driving a lot of the underlying growth story at the moment. Anthropic, for example, which we expect will IPO later this year, saw its revenue run rate top about $65 billion, about six times its previous level.

Now to the Fed and next week’s Jackson Hole Symposium. Jackson Hole is the Fed’s big annual policy gathering, and this year it carries extra weight because it will be Kevin Warsh’s first as Fed chair. We don’t expect Warsh to be drawn into near-term rate discussions at this event; instead, we think he will focus on the monetary policy framework and the reforms he envisions. He’ll give us some updates on his five task forces — remember, he set up task forces to focus on the inflation target, the size of the balance sheet, the quality of economic data, the impact of AI on jobs and productivity, and how the Fed communicates to markets.

Now, since Warsh took over, investors have become increasingly uncomfortable with the Fed talking tough on inflation but not acting on it, and as a result we’ve seen long bond yields rising by about 0.3% since his first meeting as Fed chair. There’s a real chance that Warsh uses Jackson Hole to push back against this narrative and also assert his independence. The 30-year Treasury bond yield recently touched its highest level in 21 years, above 5.3%.

What’s driving this? Well, it’s a combination of bigger fiscal deficits, heavier government and corporate debt issuance, a reduction in Fed forward guidance, and also some policy uncertainty. And it’s not just a US story — we’ve seen similar moves in the UK, in Europe, and even Japanese long bond yields. But why does it matter? Well, bond yields typically set the price of things such as mortgages, business loans, and infrastructure funding, so a sustained rise here acts almost like a handbrake on the broader economy. If yields keep climbing, at some point it could become a growth-negative driver and could impact economic activity and markets.

Now, earlier this week, Treasury Secretary Scott Bessent stepped in with a surprise move to put a lid on these rising bond yields. The Treasury announced that it is doubling its long-end bond-buying program, lifting its size to about $4 billion, and it will be focusing on buying back bonds in the 10-to-30-year part of the yield curve and replacing them with shorter-maturity debt. The market reacted with bond yields falling, the US dollar weakening, and equities moving stronger, along with gold. Now, we see this as signaling rather than a structural fix.

Turning to the Middle East and oil markets, the price of oil seems to remain within a broad, manageable range of $70 to $100. Recent headlines also suggest that there’s more oil coming out of the Middle East than official data shows, but the impact on fuel prices is a bit more nuanced than the recent oil price headlines suggest. Our analysis shows that supply still looks meaningfully disruptive. If you look at alternative pipelines, inventory drawdowns, dark fleet activity, and extra supply coming from South America, Russia, Canada, and some others, together they offset about half of the original Strait of Hormuz disruption. If you incorporate reduced global and Chinese demand for oil, it offsets another quarter of the disruption, which means there’s still a risk that global inventories remain under pressure and may be falling further over the coming months.

At the same time, while crude oil prices have stayed in a range and well off their earlier peaks at the start of the war, refining margins — or what we call crack spreads — have actually been climbing, which means the price of petrol and the price of diesel at the pump remains elevated.

Finally, South Africa. Well, the recent inflation prints have come in a little bit lower than expected, but they’re still well above the 4% upper end of the new 2-to-4% target range. So the SARB may choose to hold at the next meeting, similar to what it did at the previous meeting, and wait for more information to come through.

Also, a few words on the local government elections. The latest SRF poll shows that national support for the ANC has now fallen into the low 30s, while support for the DA has been rising to the high 20s. That shift is even more pronounced in the metros, such as Johannesburg and Tshwane, where the DA is now pulling ahead of the ANC. This trend suggests that coalition politics and the GNU might hold, and that a more reformist approach at local government and municipal level is required. Voter registration has closed, but make sure you turn out to cast your vote on the 4th of November.

That’s all for this week. Thank you for watching.