Macro Pulse Episode 2

Welcome to MacroPulse. In this week’s episode, we’re gonna cover the US elections, the recent Fed policy meeting, the Chinese fiscal package, as well as reflecting a little bit on the recent medium term budget set by national treasury. Now there’s certainly a lot of things happen over the last two weeks. We’ve seen new uncertainties enter the market and some uncertainties exit the market. And the US election certainly was one of them.

So Trump won the presidency and the Republicans won the House and the Senate and that means that effectively the Republicans have a clean sweep and can decide in a free reign on deciding policy. We believe that initially Trump will most likely look at immigration policy first to curb illegal immigration. Secondly, he will start focusing potential on the tariffs. Now, Trump did propose a 60% tariff hike on all Chinese imports. Although we think initially he may try to negotiate for a deal, and we may not necessarily get the full 60% just yet.

We also believe that the tax cuts which they propose may may be delayed. The economy in The US still remains fairly strong and robust. The Fed is still cutting interest rates and there still remains some inflation concerns in the economy and among consumers. So while that’s in play we think that the tax cuts may only come in potentially later. End of twenty twenty five, ’20 ’20 ‘6.

Then on the foreign policy side, we may see Trump moving to try and, stop the conflict between Russia and Ukraine. And from a regulation side, we may see some deregulation taking shape, amongst corporates. So we think all in all, these policies are somewhat inflationary, somewhat negative for growth, in particular, his his tariff policies. And so you will have this tension between inflation and growth, and this uncertainty stemming from exactly what his tariffs and tax policies would be. And so the next year, that’s going to be a key focus area for the market.

When we look at how the market has reacted to Trump’s, presidency, as expected, bond yields went higher as they’re pricing these more uncertainties. The term premium also increased. The US dollar increased and got stronger. And the equity market also improved on the back of the scope for more regulation and tax cuts to take shape. However, we think that a lot of this has now been priced in the market.

We think the market is now starting to focus on what are the real key macro issues at play beyond the election, and those would be what’s happening in China and what the Fed is supposed to do. Now the Fed meeting last week made it clear that they are still within an easing cycle, but stopped short of guiding towards the December cut. And the market took that as potentially a a shallower cutting cycle. The Fed did say that they don’t exactly know the speed and also to what extent they would cut rates. And so the market did price out some of the cuts which they were pricing in potentially for next year.

And that has weighed a little bit on emerging market assets. The other factor that has weighed on emerging market assets was this Chinese fiscal package. The market did expect China to come through and provide very strong fiscal package to boost growth in the economy. They expected that package to ultimately focus on local government debt, on support for the consumer, as well as support for the property market. In the end, what the market got, on Friday was earning announcement to really shore up and stabilize local government debt.

And so the 10,000,000,000,000 renminbi package that was expected by the market to be, you know, shared between those three components only went to local government debt. And so that has been a bit of a disappointment because the economy ultimately needs the consumer in consumption to improve and for that for property sector to improve as well. Focusing, however, on the local government debt and ensuring that up and stabilizing that is key to the whole reform and restructuring of the Chinese economy. It has been a weak and fragile part of the economy, and taking some of that debt and hidden debt out of the equation, you actually allow some of local governments to then start to repay their suppliers, the service providers, and actually also some of the the wages which they haven’t been able to do, in the in the recent history. So in our mind, it’s a positive yet slight disappointment on the breath.

But finance minister has also said that they are still studying the impact of using government debt to support the consumer and to support the property sector. So we believe that those policy announcements will only come potentially later this year or next year. So the Chinese authorities in general continue to ease policy overall. And I think that it that remains a positive. In terms of the, national treasury and the medium term budget that was announced now two weeks ago, there has been some positives and negatives.

On the negative side, we have seen some fiscal slippage in the sense that revenues is coming in lower than expected and expenditures higher than expected. And if you look forward, those revenue projections are probably on the conservative side. National Treasury only see growth in the economy at 2% until 02/1930, which we think is fairly low. And they haven’t really baked in the full revenue impact of the two part system yet within the budget. And on the expenditure side, what they or big chunk of the increased expenditure is because of early retirement incentives, where they want to get government workers to retire early by providing them packages.

And that cost ultimately, would weigh early on on an expenditure, but would be a boost later on, from about 2027, ’20 ‘8. It will start to to bear some fruits for overall government spending. On the positive side, what we have seen is that the fiscal consolidation continues. The debt to GDP level is now expected to peak at about 75.5%, so a little bit higher than during the February budget, but slightly earlier than previously expected. And so we think this fiscal consolidation still provides South Africa with the credibility that ultimately we are still on the reform, path and the right decisions are being made.

Not populist decisions, but the right decisions ultimately to drive growth. What we do need now is for the SARP to provide easing into the economy as inflation is coming down and as we see, you know, improvements around the world and some of these uncertainties around the world starting to fade. So overall, if we look behind all the noise, we’re still seeing a Fed that’s easing. You’re still getting Chinese authorities that tries to to boost growth and the oil price remains very low. These are all constructive for emerging market assets, but offsetting that the uncertainty around trade, the uncertainty around tariffs will be the key question mark for the next few months until we get, more certainty from Trump.

And I think at that point, potentially, China will also be willing and incentivized to provide, more easing to their economy. That’s all for this week. Good luck. Until next time.