Policy
The crisis hitting regional and local banks in the US is adding to oil-price volatility and gold demand. The crisis arguably is fallout from the Fed’s aggressive monetary policy tightening, and contributes to the upending economic relationships that reliably informed policy, investments and forecasts in the past. This feeds into higher price volatility, which reduces liquidity in the short run, and impedes capex in the long run, which limits future supply growth.
April’s CPI report was soft enough to justify a Fed pause in June. However, the overall economic data still don’t justify the magnitude of rate cuts priced into the yield curve.
There is a 50:50 chance of experiencing a major deflationary shock in the next two years, and an even greater likelihood on a longer timeframe. The good news is that several assets provide a good insurance against this risk, and that this insurance is now cheap. Plus we highlight a compelling commodity pair-trade.
This week we are sending you a transcript of my conversation with one of China’s most prominent and influential pro-market economists. Topics raised during my conversation with this Chinese expert may offer our clients important insights and provide context into recent developments in China’s economy.
Although our take has not changed yet, the immediate emergence of a second wave of banking system stresses poses a new threat to our constructive near-term economic and market views and will have to be monitored carefully.
The initial phase of the EU’s ambitious CBAM will launch 1 October and will begin collecting a carbon tax in 2026. Between now and then, it will be challenged as it attempts to put a price tag on CO2 emissions as imports cross the EU border. The CBAM will impart an inflationary bias in EU commodity and goods markets as 2026 draws near and importers have to secure EU ETS credits, the number of which, by design, will contract over time.
Indian EPS growth is set for major disappointments vis-à-vis the lofty expectations. Weak domestic demand amid tight fiscal and monetary policy entails more downside in stock prices. Stay underweight.
The Fed hiked 25 basis points at yesterday’s FOMC meeting while also signaling that the tightening cycle is now on hold. We discuss the short-run and long-run implications for Treasury yields.
As the Fed meets today, we explain what it did wrong in 1970, 1974, and 1980 that prevented inflation from being exorcised, and the lessons for 2023-24. Plus, we identify a currency cross that could rebound in the next year.
Macro and geopolitical risks may spoil the narrow window for a stock market rally before recessionary trends rise to the fore.