Macro Pulse Episode 23

Hello and welcome to Macro Pulse. The US government shutdown is now been going for more than two weeks. The previous longest shutdown in history was 35 days. And according to prediction markets like Poly Market, the probability of this shut on being more than 35 days is now 57%. This means that essential government services are not being delivered, more than 2 million government workers and military personnel are not getting paid or on unpaid leave, even services like, building permits and IPO decisions are being delayed, economic indicators like the non-farm payrols and the CPI hasn’t come out and will be delayed, meaning that, market participants and policy makers are finding it difficult to gauge the strength of the US economy.

The impact of all of this on the economy as a whole, if it’s five weeks or longer so more than 35 days could be estimated to be about 0.5% from a quarter of a quarter annualized basis. So quite significant. There’s also no end to this government shutdown. In insight to add to this uncertainty. The Trump administration last week announced an additional 100% tariff on Chinese exports from the 1st of November. This comes as a result of the Chinese putting export controls on rare earth minerals. Trump also announced that they may stop buying cooking oil from China, and also may not be able to meet with XI Jinping at the upcoming epic meeting in November.

Now, since then, the Trump administration did come out and have eased tensions a little bit by saying that they’re still open for full negotiations. But we are seeing that the trade tension with China is heating up again, has had an impact on asset prices. So, when the announcement was made last week, we saw the equity market fall. We saw bond yields come down. We saw the dollar weakening again and the gold price rise to now above the level of 5200. It wasn’t only the gold price, it’s also other names like platinum and palladium and even a metallic silver that is benefiting from this new demand for a store of value or alternative places for the store of value that is benefiting.

We believe that the path of least resistance for gold is still up. And if we look at the outlook for monetary policy, the fact that the fed has now shifted from focusing on high inflation to now focusing on softer labor markets, we believe that outlook for rates is also still there to be lower, which means that at the next meeting on the 29th of October, the fed most likely will cut rates, although at the FOMC minutes that they got last week, if you look at that, we do see that there’s still some split within the FOMC about the pace of which rates should be cut. Many members within the FOMC still believes that inflation remains on the sticky side and could still continue to surprise, to the upside. If you look at economic data, then we saw from the data that we did get, consumer confidence and small business optimism has faded. Small businesses are saying that inventory levels are high. They’re worried about the outlook for sales, and they’re seeing pressure to continue to increase prices. The bright spot in the US economy has been that corporates are faring fairly well. The Q3 earnings results that has come out thus far shows that these earnings growth and profitability is okay. If you look at luxury brand like LVMH, they report broad based improvements across the US and China. Domino’s pizza are showing some resilience. And even banks and asset managers are saying that consumers are faring fairly well. We see that within the banks and management space that they saw some flows going into, specifically ETFs from retail investors, although institutionals are getting on focusing more on active managers. There’s also a lot of activity happening from IPO’s trading that’s benefiting the banking sector.

So while the economy looks to be on the softer side, specifically on the labor market, corporates are still showing us that they experience a bigger corporate experience, a fairly good environment. So if we look at 2026, I think there’s a few things that we need to keep in mind. First of all, what are we going to see growth weakening to the extent that the fed will, cut rates further, or is inflation going to be remain sticky and the impact of tariffs continue to come through the economy to the extent that it starts to complicate fed policy? So if you think about next year, I think the first thing to keep in mind is that the impact of tariffs, the growth impact as well as inflationary impact hasn’t worked through the economy just yet. There’s still some uncertainty to do that. The US government shutdown is still ongoing and could be going on well into November. The one big provable act will also be a positive next year. Provide some fiscal boost to the economy. We see that Chair Powell will, will step aside from his position in May next year. That may make some place for a more dovish Chair to replace him. And there’s also uncertainty still around the US-China relationship. So a lot of uncertainties but also still some opportunities.

The AI boom that we’ve seen this year, the AI CapEx boom could continue and it could lead to even higher valuations than what we have seen thus far. But that also is a potential risk for next year if there’s a disappointment on either AI adoption or disappointments as it comes to productivity.

China is also facing a very important week. They will be announcing their next five year plan. We don’t expect any big announcements around stimulus, but we do expect some structural reforms to be announced. First the growth target would remain between four and a half to 5%, but there could be a focus on nominal growth. The focus on nominal growth would kind of signal to the market that they really focus on trying to get out of this deflationary trap, which they have been in. There’s also going to be a focus on quality rather than quantity. R&D investment to GDP is likely to increase and the focus would remain on AI, new energy, biopharma and aerospace. Then we see an increased focus on the household consumption and the consumer and welfare support. That could potentially reduce the savings rate. So more providing more confidence to the consumer do to spend. We also expect some announcements around, fiscal structural reforms that will improve the the outlook for local governments.

In South Africa. Good news that we got recently is that we are on the cusp of a US South Africa trade deal, according to the Minister of Trade and Industry, Broxtowe. There should be an announcement anytime soon. That will come on top of some of the more positive sentiment that we got recently from. So is that’s starting to improve that the fiscal dynamics is starting to improve, and we can see some of that news coming through and impacting our a market, specifically the bond market. So the ten year bond yield in South Africa is now sitting at 9%, which is the lowest in the last 4 to 5 years. In fact, it’s around the average of the 2016 to 2021 period. And with still some positive news potentially down the line in terms of credit ratings and greylisting and the official announcement on the on the inflation front. And we believe that there is potentially some further downside to bond yields in South Africa. It’s also been helped by the fact that the country’s credit risk premium is falling. If you look at the South Africa’s ten year CDS, that’s come down quite significantly this year. And we believe that these assets, including, the rands recent depreciation, is a reflection of some of the improvements that we’ve seen in the economy and expected to see in the economy. We believe some of that would flow over into the equity markets in the next 12 months. And so SA inc equities would also start to benefit from this strength. And that the leadership that we had this year from gold and platinum and Naspers will move towards SA Inc.

Thank you for watching. See you next time.