US Federal Revisions & Vaccine Nationalism

Matthew: Hello everybody, and welcome once again to another episode of Under the Macroscope. My name is Matthew Pearce, and apologies in advance for the slight frog in the throat, but no need for dramatic concern. I have had a Covid test, and it came back negative. So hopefully, the frog will go on his or her way quite soon. As usual, we’re going to be looking at some of the factors affecting global economies on a macro level with Skybound Capital’s chief strategist in the U.K. office, Jabir Sardharwalla. Coming up in this podcast, we’ve got quite a mixed bag. We’re going to talking about rising interest rates in certain emerging markets, and that’s something to certainly keep an eye on to see who follows.

We’re going to be talking a bit about U.S. stimulus and its effects and an update on the vaccine program, which has a knock-on effect across the globe, regardless of where it’s happening and how.

But, but first of all, Jabir, I mentioned to you just ahead of recording the podcast that I woke up in South Africa this morning and was told by one of the people that I follow closely, brace yourself in the South African market. There was some big downward moves in U.S. markets, certainly equity markets. What’s going on? It looks as though equity and fixed income markets are searching for what is equilibrium at the moment.

Jabir: Hi Matt. That’s absolutely right, and it actually stems from the U.S. We had the big Fed meeting, and Jerome Powell was put under the microscope. The Fed has basically come out with a whole bunch of revisions, upward revisions in their forecast. I’ll give you a couple of examples of it. For instance, they are now expecting growth in the U.S. this year to be around 6.5%. Before that, they had forecast of 4.2%. That’s a big shift, by any standard. It’s a huge shift. If you look at what they call the dot plots. Now that’s basically where they assess each voting member on the FOMC, Fed Open Market Committee; there’s a clear shift in expectations of an earlier rise in rates than had originally been forecast. They’re now showing that more voting members expect a rate hike in 2022. Now bear in mind that this originally was 2024. So all these figures are coming in. Now they’re still far out but just much less so.

Other things that came out of it is they expect the unemployment rate to be at 4.5% by yearend. This is an interesting one. They think that inflation is going to be at 2.4% by yearend. In other words, above target. Target is at around 2% — with the more important core rate at 2.2%. Even that will exceed the target. Now previously, both those measures, the headline and the core, were forecast to be at 1.8%. Even the Fed itself has to revise its forecast upwards dramatically.

Just as an FYI, I mean housing in America. Americans use a lot of lumber in their buildings, and lumber prices have tripled since last year. It’s added some $24,000 to the cost of an individual house price. $24,000. This is from the NAHB, the National Association of House Building.

What you’ve got now is an increase also in the 30-year mortgage rate, which has risen again for the fifth straight week. It’s well over 3%, 3.09% — all these basis points matter. The end result has been a big surge yet again in the 10-year treasury, which now I see stands at around 1.75%. It’s come off a little bit, actually. It had hit 1.8%. But 1.75%, bearing in mind that at the start of the year yearend forecasts at the upper end for the 10-year was around 2%. I hadn’t seen anything in excess of 2%, and here we are; we’re not even at the end of Q1, and we’ve hit 1.75%. This causes a lot of frustration in markets. We’ve seen it in the U.S. It’s down today already at the open. It was down yesterday. It’s going to finish the week down if things carry on unless there’s some dramatic turnaround. That’s having a knock-on effect. It just shows the importance of the U.S. to the worldwide economies.

You’ve also got a mixed bag on the interest rate front where people aren’t quite sure what emerging markets will be doing, which I’m happy to elaborate on.

Matthew: You mentioned Turkey as hiking rates and possibly Brazil and keeping your eye on other emerging markets where you’ve got to find the balance between effective exporting and the value of your currency.

Jabir: That’s exactly right. By and large, if you divide the world between D.M. and E.M., actually, there’s a third category. You’ve got D.M., EM and commodities essentially. There is some overlap. It’s a bit like a good old fashioned Venn diagram in mathematics. There is some intersect there, but just keeping it simple. What you’ve got is a situation where E.M.’s largely still rely on exports. Now a weaker currency tends to favour exports because it makes your exports cheaper overseas — a rising currency curbs inflation. I would have thought logically that if we’re going to come out of this Covid mess, which we will, I don’t think that’s an issue. Look at those growth numbers I just read out by the Fed itself, and I’ve seen numbers far in excess of that. You have to wonder where E.M. world strikes a balance in all of this, because typically what we’ve had is competition for a weaker currency. That’s what generally countries around the world prefer. What we now seem to have is a very mixed picture. We’ve had indeed a situation where the Brazilian central bank could well hike rates. In fact, there was talk about that happening this week.

To complicate the picture in Brazil, which is interesting, the commission cleared former president Lula, as he’s known, of wrongdoings, which means that he can now stand for the presidency again. If that happens, you’re going to have a very polarized society. It’s already impacting markets there because you’ve got the extreme right-wing Jair Bolsonaro, the incumbent. Then potentially, you’ve got Lula whose really left-wing and still quite popular with the masses. All that’s going to do is cause havoc in Brazil, where debt is growing at a ridiculous rate. One of the things they have to do is undergo extreme austerity to fix their economy. If you end up in the situation where you’ve got left-wing versus right-wing, that’s just going to compound the problem. Carrying on with the interest rate theme, now there’s talk that rates could be going up in Nigeria and South Africa. No one welcomes rate rises at a time when we’re all trying to come out of a Covid induced recession.

Yesterday we saw Turkey central bank raised rates, 2%. Its repo rate is now 19%. It obviously gave lira a huge lift. They’ve done this to tame inflation. It’s constantly the same old theme. You’ve got inflation, obviously growth and rising yields. It all manifests itself in rising yields.

Matthew: Can we go back to the U.S. for a second? The timing and the content of those upwardly revised forecasts on growth, how much of that do you put down to last weeks confirmation of the stimulus package? We discussed it on last week’s podcast, the fact that it was voted in. How much of a factor is that? Do we see now already the positive effects of that stimulus package?

Jabir: I think we are because certainly, that’s one big part of it because stimulus checks have already started going out in the U.S. Bear with me; I’m just trying to find in my notes. The U.S. Treasury has already sent out 19 million direct payments worth $242 billion to Americans via direct deposit transfer. Essentially they are now ready to use that if they want to. Now there’s a different school of thought, and I’ve looked at a couple of interviews as to what the average John Doe he’s going to do with that stimulus check. But a further 150,000 paper checks went out in the post, and they’re a smaller portion but still $442 million. That’s available to spend. I think that’s had a big impact on Fed thinking. They must be looking at this and thinking, “Well, Biden has done very well to get such a huge figure through.” The concessions he had to make were quite minimal, and now there’s more in the pipeline in terms of infrastructure and the green energy bill.

Matthew: Jabir, I have to say slightly flippantly, one of the most extraordinary things about that last statement is the existence of paper checks.

Jabir: Yes. Old habits die hard, I think.

Matthew: We’re fast running out of time, unfortunately, but we can’t have a podcast at the moment without talking about vaccine rollout programs. It’s all a bit messy, the U.K. and Europe. AstraZeneca vaccine has been in the news. A concept that you’re describing quite aptly is vaccine nationalism.

Jabir: Absolutely, and it is just that. Honestly, it’s almost become another political tool, a political weapon. What’s the background to this? Well, you’ve seen how Europe twice now has threatened, I’m going to call it, a blockade on the AstraZeneca side of life because they’re arguing that AstraZeneca hasn’t fulfilled its obligations. Then on top of that, various other vaccines like Pfizer, Moderna under the signed agreements get shipped across to Europe. Part of them are actually manufactured in Europe. I think, if I’m not mistaken, it’s Moderna who has part of its vaccine manufactured in Spain. Then it gets shipped to the U.K. and other destinations. You’ve now got a situation where the E.U., because of its really poorly planned vaccination program and rollout, has threatened action on those further exports, or at least they’ve reserved the right to do so. That has compounded the argument between the U.K. and the E.U. Quite rightly, it’s now being labelled Vaccine Nationalism. It’s quite sad, but that’s not helping markets either. It’s compounding the impact.

Matthew: It all sounds very messy to me, and how sad in a way that people’s health and wellbeing is, as you describe it, being used as a political weapon.

Jabir: Exactly. Absolutely.

Matthew: Jabir, as always, great to catch up with you and get your views. The Under the Macroscope podcast is available on Apple, Spotify, and the Google podcast platform for Android. All past editions of Under the Macroscope are available at Skybound Capital’s website on Thanks as always, Jabir, and thanks to Ross Muller in the Skybound Capital office. Until next time on Under the Macroscope, have a great week.

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