Macro Pulse Episode 36

Hello and welcome to Macro Pulse. This week we discuss two very significant macro developments and what they mean for markets: the US-Iran agreement, and Kevin Warsh’s first Fed meeting as chair. Together, these two developments may shape markets for the rest of the year. Coming into 2026, economic conditions looked favorable, with low interest rates, a weakening US dollar, and oil close to $60 a barrel. Then the war broke out. Oil spiked to $100 a barrel and fears of stagflation emerged, meaning higher inflation and lower growth. Global inflation did rise, but global growth did not fall as much as expected. Now that the US and Iran have reached a ceasefire agreement and oil is flowing again, a 60-day framework for negotiations toward a broader peace agreement is in place. All military activity has stopped, commercial ships can move through the Strait again, and both sides are negotiating on nuclear enrichment, sanctions, frozen assets, and economic support. Iran gains access to the global economy, Trump may win back support ahead of the November midterm elections, and the agreement also eases supply chain pressures across fertilizer, aluminium, and helium, while improving trade and consumer activity.

These improvements come on top of a US economy that is already remarkably resilient. Economic activity has remained firm, labor markets have been stable, corporate earnings have surprised to the upside, and bond yields have moved higher, not driven by inflation fears, but because real rates have moved higher reflecting a more robust economy. This has also helped equities rise. The Fed has no choice but to admit these conditions pose a challenge in getting inflation down to the 2% target. At Kevin Warsh’s first meeting as Fed Chair, rates were left unchanged, but the big surprise was that half of FOMC members now see at least one rate hike before year-end, and at least a third see two hikes. Markets are now expecting two hikes, with the first likely at the September meeting. This is a significant shift for two reasons: markets were still expecting Fed cuts at the start of the year, and these hikes are driven more by a stronger economy than by fuel prices. Warsh also delivered one of the shortest post-meeting statements on record at just 130 words, removed forward guidance, declined to publish his own rate projection, and announced five task forces to examine the Fed’s balance sheet, communication strategy, inflation tools and data, the overall inflation framework, and the impact of productivity on the economy. The Fed will talk less and let macro data do more of the talking.

In the past, the Fed has always eventually hiked rates when nominal GDP growth remains above the policy rate, so Treasury yields and the US dollar are expected to hold firm in the short term. That said, the US economy is narrowing, increasingly focused on AI-related capex and high-income consumers, which is unsustainable over the long term. The big question is whether the US and global economy can absorb a series of rate hikes. For South Africa, the implications are mixed. Lower oil prices reduce inflationary pressures and support consumers and growth, but the outlook for US rate hikes could weaken the rand and keep the South African Reserve Bank on a path to hike rather than cut rates. SA entered this period from a strong position, with structural reform progress intact, but cyclical headwinds have slowed growth. Lower interest rates and lower inflation are needed before SA can talk about rate cuts again, potentially as early as early next year. SA assets remain exceptionally cheap but need that catalyst to perform. Three months ago markets feared stagflation. Today the debate has shifted to lower oil prices, better growth, stronger supply chains, and a cautious Fed as the US economy continues to outperform. The key question for investors is no longer whether growth collapses, but whether the US economy can remain strong in the face of potential rate hikes, and that will likely be the defining macro debate for the remainder of 2026.