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00:03
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In this week's episode of Standard Bank's InMarket Insights podcast, I, Mamokete Lijane, will be having a follow-up conversation with Standard Bank's Head of FX Trading, Tom Anderson, on the Trump Trade. |
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00:14
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Tom, who by the way is probably the most enthusiastic fisherman on Standard Bank's trading floor, will also share some thoughts on the South African Reserve Bank's proposal to lower their inflation target. Donald Trump has now been the President of the United States for five months and it has been, to put it mildly, a tumultuous time for financial markets. |
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00:32
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When Tom and I last spoke on the 7th of February, we were just a month into the second term. At that time, a lot of executive orders had been signed, and we knew a lot more would still happen. In the four months since, the trade war, which was initially concentrated on Canada, Mexico and China, has expanded to the world at large. |
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00:50
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Donald Trump has quite a different approach to the conflict between Russia and Ukraine, and in the Middle East. There was quite a bit done by DOGE, and the House of Representatives has just passed the big, beautiful bill. All of this has had a profound effect on the markets, including a very difficult trading period after Liberation Day in April. |
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01:10
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We meet again to update ourselves and listeners on where we are now, and what we think will happen next. So, Tom, what happened? |
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01:18
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Hi, Mamokete. Thank you very much for having me back on your podcast. |
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01:23
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So what happened? I mean, we spoke about Project 2025. We spoke about Steve Bannon. We spoke about the influence of Elon Musk—although at that stage, he'd been a sort of late entrant. But I think the sort of truth of it is that, actually, a lot of the hype that we saw into the Trump inauguration around the dollar and around the sort of sell off we saw in Treasuries that was close to being the high. We have seen some other fairly odd things since then, but much more to do with the steepening of the curve as opposed maybe to just the sort of out and out level of US rates. |
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02:08
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So, I think, a lot of what we spoke about was Trump generally feeling buoyed by his own popularity. So, his sort of decision making and his policy seems to be fluid around, you know, how he's feeling, he's performing within the market, within his sort of peers of billionaires. |
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02:32
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And I think that has very much played out. I think we saw that period of time where we did sort of have some very heavy rhetoric around the tariffs that would likely to be put on the rest of the world. But in particular, the sort of all-off he had with China in the end. |
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02:51
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And I think the sort of walk back we've seen post that talks a lot to the fact that they were unable to cope with this sort of US sell-off as we saw in the back end of the Bund curve, and the fact that, actually, the talk was more of the US not being a safe haven, or the dollar not being the currency of choice under a Trump administration. And of course, as an out and out MAGA—an out and out MAGA man—that's not really what you want to hear. |
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03:22
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So, regardless of the fact that, ultimately, that could have been better for trade maybe, and this could have sorted itself out, the headlines didn't support a lot of the decisions that Trump was making. And certainly, what was quite weird, is maybe certain other countries did sort of well out of these deals. I think the UK in particular, you know, managed to get themselves a pretty good deal. The Europeans held the line on that, which I think was pretty smart of them. And so, all-in-all, Trump was sort of left slightly on the back foot and had to go back on some of this policy. |
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04:02
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Now, if we talk about what's happened in markets, we saw that initial big move higher in the dollar. We then really in the period of time where Trump announced that the tariffs that he planned to impose, and when we saw the subsequent reaction from China and a few other countries, that, you know, it became clear that this was going to be more serious than we thought, and maybe even the stockpiling we saw from certain companies in order to try and get parts in before we saw the tariffs implemented, you know? I think in that period of time, you know, the sort of deep instability caused to move higher in the dollar against many sort of emerging markets, but realistically everything that was sort of a safe haven did better against the dollar. So we saw a... |
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05:00
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Tom, I don't want to interrupt you, but I just wanted to actually drill down a little bit and that—on that story. So, a lot of, you know, what people are talking about in that market turmoil in April and in the subsequent period, was this idea that the dollar could very well be falling off its sort of reserve currency safe haven status. And linked to that, this idea that there was capital outflows from the US because there was so much concern around firstly the imbalances within that economy, but secondary also that this volatile policy making that we're seeing out of this administration. What would be your thoughts around that? And do we think that the dollar continues to weaken? Do we think that bid was overdone? Do we think that maybe the dollar is still going to be the dominant currency going forward? |
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05:56
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That's a that's a very interesting question. So. Okay, so I would consider it like this. Now we're in a situation where we've got high inflation, or we have had for the last year and a half, that high inflation has been caused by $5 trillion being printed by the Fed and various other central banks. And actually, the mechanism of giving that to people was a lot more direct than it was in 2008 and definitely more direct than it was in 2001. |
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06:27
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So, we're in this situation where we've had this unnaturally high inflation. Now, the question is: who has got room to keep printing? So, we're in this situation where anybody that looks like they can afford to, and have room to, maybe keep printing, are going to start attracting capital. So, if we think about who that is, the Europeans definitely do. I mean, Germany in particular have lots of room. They haven't really got sort of stuck into a lot of the QE that other countries did in the period in—during the crisis. And actually, I think they probably have room to keep going. |
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07:12
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I think, in Japan, although their debt to GDP ratio is is sort of around 260%, most of that is—more than half of that—is held by the Bank of Japan, and they have very, very low rates, and they also own a lot of US Treasuries. In Switzerland, you know, we have a situation where that side of the balance sheet for them is never gonna be a problem. |
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07:37
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So in this situation, where anybody that seemingly has room to expand without causing a sort of fiscal imbalance or having a higher percentage of revenue be taken up with servicing debt, they're going to start attracting funds. So that would be Europe, Japan and Switzerland, and that's what we started seeing. |
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07:59
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So, that kind of risk-off moment that we saw, it's hard to say whether it was a global risk-off moment as we may have seen in 2008, and more sort of rotation into countries that, or regions that, maybe have more scope for further easing if we do see a big downturn. |
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08:18
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So one of the things that actually emerged out of that also was this idea that the US is trading like an emerging market. So, in an emerging market, you go through a period of turbulence, crisis, concern. What tends to happen is your yields go high, your currency goes low and your stock market goes low? |
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08:35
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Where the US would have, quite the opposite happened, where interest rates go lower, your currency strengthen—their currency would strengthen as they their stock market sold off. So, do you think that that signalled a fundamental change on how markets are going to trade going forward? Do you think it was just a momentary lapse? Is it something that we should expect to see repeat if you were to see growing concerns around US growth going forward? |
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09:01
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So, I mean, I'd say the way to look at that problem is: so we saw it wasn't that there was a sell off in the front end of the US curve; the front end of the US curve still did pretty OK. I mean, swaps out, maybe one year, were quite a lot lower. The problem is the steepening of the curve in that scenario. |
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09:23
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So especially, I'd say, the steepening in like, 10 to 30 year; that's the sort of stuff that will probably make, you know, US policymakers very, very uncomfortable. |
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09:35
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So, you know the sort of, I mean, the indicators that one might look at would be, you know, the CDS on the US, and particularly the front end and that kind of inversion. And then you might also look at the spread between swaps and government bonds. So, if we think about what happened in 2008, the bank credit became a real problem, so Eurodollar futures, which were based on the rate at which banks would pay to borrow money against Treasuries, that spread went went much, much wider and that was, that was talking to the fact that banks had to pay up to borrow, whereas the Treasury didn't. |
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10:18
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Now, what we've seen this time is almost a slight reversal of that in that bank credit looks better than Fed credit, which is an odd kind of thing to consider, but effectively, their bonds have sold off against their swaps. Now that, for me, is certainly—that is what you would expect in an emerging market, if you were looking at investors telling the government that they weren't happy with the way that they were managing the fiscus. |
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10:45
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So yes, in answer to your question, we saw things happen in the US that you don't expect from the country which is supposed to provide us with a risk-free rate in in dollars. |
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10:55
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But things seem to have calmed down now. Equities are just a hair's breadth shy of their all time highs. Everything is happy with the world again. |
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11:05
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US Treasury yields are starting to tick lower. The dollar hasn't recovered by any stretch of the imagination, at least not to, you know, the pre-inauguration day levels, but it seems to be rallying. It's holding its levels reasonably well. Are we out of the woods? |
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11:21
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So, I would say we're looking at two kind of different things. So, my argument would be that before Trump, the US was heading into a recession. We were starting to see some of the forward-looking data rollover, big signs of kind of stagflation where we'd see in ISM type PMI numbers. We'd see higher prices paid, but actually services, as we saw yesterday, services ISM lower. |
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11:50
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I think, we saw the JOLTS jobs data this week, which I thought was super interesting. The market took that as quite positive. More jobs were advertised but actually, the number of people quitting their job to get a job that pays more money has gone down and the number of people being involuntarily laid off has gone up. So we are seeing all the signs of fragility in the US and I don't think that has anything to do with the tariffs that may have sped it up. But ultimately, we were going into this US recession regardless. |
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12:20
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Now, how does that work? Well, we've got—so, we're in this situation where there's still too much liquidity in the system. So things can—asset prices can be too high for much longer than we think they should, but the, sort of, the disparity in that is that wages are not increasing as much as they were before. |
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12:41
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And actually, people are finding it very, very expensive. We're seeing housing markets start to roll over a little bit and we'll continue to roll over a bit, but I feel as though the two things get confused. The US was going into recession before Trump. He may have just sped up some of the sort of geopolitical and maybe some of the the sort of the processes of getting things done with different tariffs. That may have just sped up the process slightly if that makes sense. |
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13:10
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It makes a lot of sense, but I think the complicating factor here, and this is something I'm really struggling to make sense of, is that we spoke, you know, you spoke quite a bit about the fact that countries that have got the ability to inject fiscal stimulus, essentially, are the ones that are going to do better going forward. And the US definitely, at 120% debt to GDP ratio, probably doesn't have that scope. Having said that, having said that, you've got this big, beautiful bill that has just passed through the House of Representatives is now going into the Senate for approval. It might or might not be approved. We don't know. |
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13:48
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Definitely, over the past day or so, the outlook for the bill has dimmed somewhat with Elon Musk now sitting on the other side of the argument to the Trump administration on the issue. But if the US were to actually continue to spend, because the bill essentially proposes that, you know, the tax cuts that were due to expire, not expire, it suggests that there's more fiscal stimulus than what was being—would have been in the base. Does that not extend that period over which US equities continue to do well? |
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14:22
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Is it not supportive of the US economy, at least to some extent, for some period? Does that not drastically reduce the possibility of a recession? |
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14:35
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OK, so to break that question down. I would say the one certainty with that is that you'll see a weaker dollar. So, the US, you might see, I don't know, certain parts of the SNP that haven't already been overly inflated in terms of P ratios, as we've seen in—with a lot of the tech sector. |
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14:57
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They might continue to do okay in dollars, but I would think that over that period, if you've got this really expansionary policy, I would think the dollar would have to give up at least what they're gaining, and I think that's going to be the kind of big rotation. If we think that—Japan's a good example. GDP's at 260%, the BOJ own half of that, but they also own a trillion plus dollars of US fixed income and more in terms of US equity. So, if you saw that rotation start to happen from other countries where, actually, the return in yen or the return in euros or even, I mean, dare I say, the return in rand, starts to not look that great, we might start to see some some flight of capital out of the US and back home to, in some instances, where it probably belongs. |
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15:58
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Yeah. No, we saw a little bit of that price action quite briefly actually in South Korea. So as we were. |
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16:06
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But I mean the tariffs are still not a done deal, right? The tariffs were only suspended for 90 days, which was ostensibly to give everybody a chance to renegotiate, you know, enter into deals etcetera. But they're going to come back. |
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16:25
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What do you think happens? Because, you know, I see now there's an acronym out there that is Taco Trump always chickens out. And everyone is betting that he's chickened out on the tariffs. |
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16:37
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But he really doesn't like Taco. Does that mean he's going to actually try not to chicken out this time? What is the tariff story look like in its second iteration? |
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16:50
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There are certain people, I think, who consider themselves quite serious policymakers in Trump's administration, like Bessent. How did they traverse this territory? They've opened this war. The battles are coming thick and fast. They're winning some. They're losing some. What do you think happens when this question comes back on the table? |
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17:12
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Okay. So let's—if I breakdown this question—so, the first part of it is that Tariffs haven't happened. My argument is that they have. So, I think what we've seen in terms of a lot of the components of the PMI numbers, the prices paid being high, we've seen big stockpiling of car parts, for example. |
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17:40
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So, that has already happened. Whether or not those companies are now able to pass that on to the consumer, or if we don't see tariffs go through, it would be very difficult for Ford to say: 'Okay, well, we thought they might happen, so everyone's cars are 50% more expensive this year.' |
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17:58
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So I feel like it, you know, as much as we say they haven't happened, that this sort of scare, that shocking to the system of slightly higher prices, or certainly producer prices, is already in. So, that's, I suppose, that's quite interesting. |
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18:14
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What does that really do? I think that just puts more pressure on some of these companies who are going to struggle even more to kind of pass on a lot of these extra administrative costs. |
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18:26
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The the sort of—the thing around Trump and Taco is like, when you meet Americans and you discuss with different types of, you know, different voting members of the American public, I think some of the information that people receive is so far removed from what's actually going on. I'm not sure if a lot of Trump supporters really know that that's a thing. |
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18:53
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I think that there's a very good chance that, you know, in the world that he's created, through truth and now through X, which has effectively become a right-wing soap box, he gets fed the information he wants anyway. So, you know, whilst we, and CNN—and whoever—wants to refer to him as that, I'm not sure he's going to be that bothered. He will be—he'll be upset if the dollar gets significantly weaker on the basis that America stops being a stronghold, and I think he'll be upset if his kind of MAGA supporter base stopped supporting him. But other than that, I think he just carries on. |
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19:33
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But on the dollar, I'm mean, I'm just going to, just to close off on that point, before we move on to that another one. Surely there are all these things that he's doing that are contradictory because you can't have fiscal stimulus and a strong dollar. You can't want a strong dollar and, you know, you also want to get your way on all these other policies. |
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19:51
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And also, the other thing, and this is something I think that we've discussed, is that you can't impose this that much by way of tariffs on an economy that's structured the way the US is and not get a slow down in growth. So then, when you get the slow down in growth, what are you going to do? So all of these things don't seem to hold together in balance. |
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20:10
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No, I completely agree. So just to answer the first part of that: everyone wants a weaker currency. You just don't want it to be blamed on you. So I think with Eurodollar at $1.30—absolutely perfect for Donald Trump. But he doesn't want it to be about the fact that nobody—that his tariff policies weakened, you know, the fabric of the US, or whatever. |
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20:34
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And yeah, so I think in general, that there's lots of conflicting policies, but a weaker dollar suits the US for sure. But it just doesn't want to be his—it doesn't need to be termed as his fault. |
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20:50
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But nominally, you also want low costs because you promised to cut prices on day one, and you've got tariffs on the one hand, a weaker dollar on the other hand. Those are not the way—the pathways towards low inflation. |
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21:03
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Well, I suppose in his calculations, or whoever's doing his calculations, if you take oil from $80 to $45, and you produce your own, and do whatever you want with that, and then you have higher job creation because you've brought a lot of jobs back to the US, goodness knows how they're gonna do that. But I mean, if that's in part of your calculation, then I suppose you have this weaker currency, but you're importing this. |
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21:27
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But then these are private sector producers of oil. They're not gonna be producing oil at $45. |
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21:33
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I suppose it depends, it depends on what the government does to subsidise that and, you know, I'm not sure what part of that is to do with economic growth or energy security, but certainly I think, in his mind, he grows his way out of this. But that, for me, in in any instance of this, whether he grows his way out of this or whether the US falls away, it just—it's all a weaker dollar. |
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22:05
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But so, after all the things that we've said back and forth about this, that and the other, what seems to be coming through, and correct me if I'm wrong here, is that there is a lot of moving parts. A lot of them don't hang together nicely. Their administration is probably going to have to pivot at some point depending on what the pressure point is. And so this uncertainty is maybe here to stay? Would that be a reasonable assessment, do you think, of the situation? |
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22:33
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Yeah. I would take it one stage further. The the US were going into recession regardless of Donald Trump. We're still going into recession in the US. The uncertainty is going to mean that they cut rates later than they should start cutting rates and that's going to cause a more severe and a deeper recession. And the tariffs, actually, in my opinion, the—whatever administrative price increase we see now, I would say that the year-on-year effect on CPI will be worse, or will be—the CPI will be lower year-on-year as a result of this. I think the overall effect on growth at this stage in the US economy will be a real, real problem. |
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23:16
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And it's a real problem politically, right? So... |
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23:19
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Absolutely. |
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23:19
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It all sounds very, very complicated. So now, you missed the rand. We've talked about all of this. So what for the rand? |
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23:27
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The rand. Okay. well, I mean, for me, the rand has been in a pretty strong situation now for quite a few months. I feel as though the positioning that has occurred in the local market as a result of Reg. 28 has meant that there's a lot of cash that's already been offshored. |
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23:52
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I feel as though the SARB's reluctance to cut rates, to make sure that over this period of time there were some stability in the currency, and we absolutely took out any real risks of a big tariff sell off as a result of tariffs. |
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24:13
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I think also, you know, that they were probably aware of some of the ruptions in the GNU, and so also probably didn't want to be seen as cutting rates too early. But the fact of the matter is the GNU looks fairly okay for now. We don't know what will happen in the next 12 months when people need to be replaced and things could change. But right at this minute for me, real rates in South Africa are much too high and I think they're very, very supportive of the bond curve flattening, and I think they're very, very supportive of of the rand strengthening. |
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24:54
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We've started to see that, but for me, you have this scenario where the rand will struggle to sell off, given that there's already this kind of market positioning. And at the same time, it's pretty easy just to sit long, even sort of front end, right, but certainly like 10-year, with the sort of 10 handle, I think is just too high. |
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25:18
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Particularly if inflation, at 2.8% and core inflation at 3%, if we continue to hang around at these levels, which the SARB, in their last MPC, seemed to suggest they were comfortable that we might, if we see oil kind of around here and no real risk to the rand, I can easily see rates in South Africa below 6% in the next 12 to 18 months. |
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25:50
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Okay. So, I mean, that kind of scenario that you've painted is very much aligned with what the SARB's sort of scenario looks like. So, they're talking about interest rates at 6% over the next 12 months. |
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26:02
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But this is obviously linked to the proposal that they've got on the table, I don't know if you can call it a proposal, to change the inflation target and move it actually down to 3%, because if it gets to 3%, then 3% is where you live and all of this repricing is going to happen to reflect that very important policy change essentially. |
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26:22
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But I want to ask you the question. So markets seem to be moving to price in that scenario, the scenario where the inflation target has actually shifted from 4.5 to 3%. What happens if the SARB comes out tomorrow and says, or the SARB and treasury come out tomorrow and say: 'We have moved the inflation target, officially to 3%'? What happens to prices then? |
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26:45
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I mean, this is the conversation we've been having on the desk probably for the last three months. So, maybe, to take us through a few scenarios. So, I mean the official target is 3 to 6% still. 4.5% is what in 2017/2018 the governor decided would be a better way to look at this, because previously, the real target was kind of, let's call it, below 6%. Right? It's kind of where we were. |
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27:17
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If we think about the governance we've had in the last 15 years—we've had Jill Marcus, who took us into negative real rates, and we've had LK, who's kept us at 4.7 - 5.2%, in fact, two prints ago. So, we've got the same inflation target of 3 to 6%, and yet we've had real rates at -60 basis points and plus 500 basis points. |
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27:44
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So, my argument is: the target. Maybe we're all making a bit too much of it. I mean, they've kept real rates higher than they need to given where growth is. Now price stability, which is the actual mandate—not sort of overall growth and price stability—the kind of dual mandate that potentially they gave themselves maybe 10 years ago. |
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28:15
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I mean, you'd have to argue that, with inflation at 2.8%, whether it's 3 to 6.3%, or 4.5%, we've got—real rates are too high, and they need to go aggressively. Now, I think whether inflation—I'd maybe make this point: the SARB have been extremely prudent, some might say too prudent, but they've certainly been prudent. They have banked this. This is now the time that they can cash it in. |
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28:43
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And I think what they need to do is go through this process slowly, and with more guidance as they've now started to give us, and then really just monitor what happens to the currency, what happens to equities, what happens to the back end of the Bund curve, and the market will tell us whether or not, you know, 500 basis points real rates is okay, or whether or not we really need 300. Because in my mind, if you have inflation at 2.83%, let's say, I don't know, 2 to 4%, or whatever we'll be looking at, I don't think we're going to need real rates with the sort of stability that maybe the GNU starts to give us. |
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29:29
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I don't think we need real rates at these kind of super-protective levels that we've got at the moment. And so, if we just went back to sort of where we'd be in the normal distribution of real rates, I think we'd maybe be 250—200 to 300, let's call it—over 3%. So I would think, the right space for for the policy rate is sort of 5.5%. |
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29:52
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You know a lot of us have got mortgages right, that are debt financed? So from your lips to LK's. |
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30:00
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I include myself in that. |
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30:01
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Maybe, maybe the MPC needs to like, you know, listen to this podcast and hear our pleas. |
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30:06
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But it's an interesting thing, right? If you look at all the other parts of the market. So there's a huge problem at the moment with the amount of rand that's sitting in the system. We've got a huge amount on deposit with banks. Now if you've got a country that's growing at, let's call it, we've all written it down to 1.2%, let's say sub-1 % this year, right? You've got a currency that doesn't really sell off, and somebody's willing to pay you 500 points, kind of real rates, in the one year space. |
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30:38
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You just always leave your money at a bank. So, I think if they want to start seeing growth and sort of CapEx investment, they're going to have to make it viable for people to do that, by by making it, you know, expensive for them to leave their money on deposit overnight. |
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30:55
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So that's a very radical way of looking at things. Just to conclude and I'd like to hear your thoughts on this. So, the proposal that you're kind of like putting on the table, softly-softly of course, is this idea that the Reserve Bank itself is constraining growth beyond what is maybe reasonable and that you need material rate cuts that can actually be accommodated while maintaining price stability. And that would be the right policy move for this country. Is that what you're saying? And I'm gonna send this to LK, FYI. |
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31:35
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That's fine. So okay. So, I'd put it this way. So, you're talking about lots of different time periods, right? So, if you cut rates at the wrong time, you have real rates that are too low and you end up with this extremely steep bond curve with the sort of debt profile we've got, then you're just saddling—our mortgages might sort of move down slowly—but actually, we're just saddling future generations with a really high cost of borrowing. |
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32:09
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Now, I think what's happened now is we've got ourselves to the point with the kind of conservative real rates that we've had for the last few months that we can see that things are starting to come a bit lower. |
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32:24
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There's a little bit of faith in the system; people understand the prudence of the central bank that they will definitely not just let this sort of stuff go. If anything, they'll be on the sort of prudent side of all of this. And in that case, I think yes, then I think they do have the space to move rates down at the front end. And I don't think it's going to have the same effect in terms of curve steepening, pack widening, whatever, that maybe it would have had six to nine months ago, which is potentially why they left rates where they were, to just, to guarantee that we weren't going to have this kind of sell off. |
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33:05
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We've got to remember, like a lot's happened in this country with the election, with the GNU. A lot of things that we sort of didn't expect to happen have kind of happened and it feels like we're in a space whereby, if given the chance, if we got slightly lower rates and we could get a bit of growth, we could start to get a bit of a kick start on that kind of 1% GDP and maybe give that sort of 2 handle next year, maybe even a 3 handle the year after. |
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33:32
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A 3 handle? Anyway, I'm going to leave with that Tom. I think I'll leave it at 3% growth. We haven't had anything near that in so long that I'm just going to leave it in the ether and hope it comes true. |
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33:44
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This is when you invite me back on the 2027. |
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33:47
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So when, when you're back on this podcast and growth is actually 4%. But thank you so much, Tom, for joining me. It was a great conversation and I'm sure we'll speak together again soon. |
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34:00
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Great. Thanks for having me. |
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34:01
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Thank you very much again for joining us on Standard Bank's InMarket Insight Podcast. |
