Macro insight summary for the week
In the past week, concerns have increased about the U.S. labor market and whether the Federal Open Market Committee (FOMC) will ease rates by 25 or 50 basis points. Investors are particularly focused on the significant 818,000 downward revision in the Bureau of Labor Statistics (BLS) payroll data this morning, which has challenged the year’s previously reported strong labor growth.
- This revision helps support the easing narrative at the Federal Reserve. The larger negative revision could lead to more pronounced easing, potentially starting with a 50-basis point cut, affecting the Yen carry trade.
- If consumer price index (CPI) and unemployment data in early September align with a slowdown narrative, the Yen might strengthen (it is as I write), impacting market volatility and risk-taking. At the same time, domestic Japanese politics suggest support for a gradual normalization of the yield curve, which could further influence Yen funding and volatility.
- With Jackson Hole this weekend and the recent FOMC minutes showing a likely willingness to ease rates the question of how much easing and what effect that will have on the Japanese carry trade remains at the forefront.
- Overall, this situation is favorable for long volatility and suggests clients should address concerns about economic slowing and more elevated levels of volatility.
Election Implications: Tariff policy
While there has been a view that both a Harris and Trump administration would be aggressive in their use of tariffs on China, we think there is a nuance on which the market has not fully focused. The De Minimus exemption.
- There is growing concern about potential changes to U.S. trade policy, specifically the possibility of repealing the De Minimus exemption for goods imported from China valued under $800.
- This change, more likely under a Trump administration than a Harris one, could impact U.S. retailers and companies with major Chinese suppliers, particularly in the apparel, retail, and small electronics sectors. In anticipation, a list of target companies that benefit or suffer from this risk has been compiled.
- Economic benefit from increased tariffs on China would likely accrue to Mexico and India if such a tariff change occurred.
| Trump Victory Implications | Harris Victory Implications | ||
|---|---|---|---|
| » | Tariff implications are bearish on renewables in general. Tariff implications for under threshold value importers from China hurts retailers and electronics and moderate value machinery. | » | Bearish on healthcare concern. |
| » | Bearish on bonds because Trump tax cuts likely get extended. | » | Bullish on renewable sector. |
| » | Bullish on crypto. | » | Bullish on cannabis sector. |
| » | Bullish on healthcare because of less aggressive price controls and more focused on open minded Federal Drug Administration (FDA). | » | Bearish on aerospace and defense sector. The money for first time home buyers will need to come from somewhere. |
| » | Oil companies should benefit from less restrictions on drilling. Large oil companies should benefit but pipelines could also surprise upwardly. | ||
| » | Defense and aerospace benefits from greater commitment to defense spending. | ||
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