Rising US fiscal risk signals dollar weakness and yield spike ahead: Jahangir Aziz
Jahangir Aziz
,
JPMorgan
.
Help us analyze and understand what the key talking points for
market
participants are right now. The 9th July deadline has already passed, and we're now waiting for the 1st of August. However, there haven't been any major announcements so far, and many tariff deals are still pending. How do you think market participants will interpret this, especially since the markets have shown resilience recently?
Jahangir Aziz:
The markets are clearly showing resilience and are shrugging off the new or recent set of tariffs that have been announced. However, let me make two points. First, August 1st is after July 31st, and the market has somewhat forgotten that amidst all the talk about new tariffs and the Fed. On July 31st, the federal appeals court will begin hearing the case of the appeal made by the government regarding a case they lost in the
US Court of International Trade
. The court ruled that all tariffs imposed under IEEPA (International Emergency Economic Powers Act), which includes universal tariffs and reciprocal tariffs, are inadmissible. Depending on what the appeals court does on July 31st, or maybe in a couple of days (since it is an appeals court), these tariffs could become moot. This is because IEEPA, the act on which both the tariffs and the reciprocal tariffs are based, could no longer be used. In that case, we could face more months of uncertainty, as the US government may then shift away from IEEPA tariffs to tariffs based on other sections of the trade act, such as Section 301, Section 232, etc. So, while August 1st is a key deadline, July 31st—just the day before—could have a meaningful and material impact on what we wake up to on August 1st or 2nd.
Explore courses from Top Institutes in
Select a Course Category
Digital Marketing
Leadership
Management
Finance
others
Degree
MCA
CXO
Public Policy
MBA
Operations Management
Project Management
Product Management
Data Science
Design Thinking
Data Science
Cybersecurity
Others
Artificial Intelligence
Technology
Skills you'll gain:
Digital Marketing Strategies
Customer Journey Mapping
Paid Advertising Campaign Management
Emerging Technologies in Digital Marketing
Digital Marketing Strategies
Customer Journey Mapping
Paid Advertising Campaign Management
Emerging Technologies in Digital Marketing
Digital Marketing Strategies
Customer Journey Mapping
Paid Advertising Campaign Management
Emerging Technologies in Digital Marketing
Duration:
12 Weeks
Indian School of Business
Digital Marketing and Analytics
Starts on
May 14, 2024
Get Details
Skills you'll gain:
Digital Marketing Strategy
Search Engine Optimization (SEO) & Content Marketing
Social Media Marketing & Advertising
Data Analytics & Measurement
Duration:
24 Weeks
Indian School of Business
Professional Certificate Programme in Digital Marketing
Starts on
Jun 26, 2024
Get Details
Skills you'll gain:
Digital Marketing Strategies
Customer Journey Mapping
Paid Advertising Campaign Management
Emerging Technologies in Digital Marketing
Digital Marketing Strategies
Customer Journey Mapping
Paid Advertising Campaign Management
Emerging Technologies in Digital Marketing
Duration:
12 Weeks
Indian School of Business
Digital Marketing and Analytics
Starts on
May 14, 2024
Get Details
Skills you'll gain:
Digital Marketing Strategies
Customer Journey Mapping
Paid Advertising Campaign Management
Emerging Technologies in Digital Marketing
Duration:
12 Weeks
Indian School of Business
Digital Marketing and Analytics
Starts on
May 14, 2024
Get Details
Also, we'd like to get your view on developments regarding the Fed chair. With US inflation seeming to be under control, if there is no rate cut as the market expects, do you think this could lead to a change in leadership at the Fed?
Jahangir Aziz:
That's a completely different issue, and it's hard to speculate on it. But let me start with your first point. You mentioned that inflation is under control. Well, if you look at goods inflation last month and exclude autos (which have dampened due to price cuts by Japanese auto manufacturers selling to their subsidiaries), goods inflation in the US was running at around 5.5%. Even though there has been a significant shift away from China to countries with lower tariffs, like ASEAN, Vietnam, Malaysia, Thailand, etc., and many firms are absorbing tariff increases on their profit margins for now, goods inflation—excluding autos—still stands at 5.5%. The tariff impact is taking longer than expected. As we had anticipated, it would take 2 to 4 months for the tariff effects to hit inflation. Just because it isn't showing up in the data now doesn't mean it won't later. The Fed is aware of this and will be watching for signs of this pass-through and also keeping an eye on non-farm payrolls. Although the most recent non-farm payrolls report showed a surprise number of 147,000, the private sector non-farm payrolls stood at just 74,000—one of the lowest in the past two years.
I want to talk about India. The only missing piece seems to be what happens with tariffs, while India is holding ground. There doesn't seem to be a consensus yet on how much tariffs India will face. Where do you think this situation is headed?
Jahangir Aziz:
My guess is that since India hasn't received a letter yet, at least negotiations are still ongoing, which is a very good sign. Unlike countries like Japan or Korea, which have already received letters and now have to scramble to start trade deals, India's negotiations are still in progress, and the US is not just saying, "Here's the deal, take it or leave it." So that's a positive sign. As for where the tariffs will settle, I don't have an insider perspective, but my guess is that India will likely try to protect its agricultural sector, as it should. India would probably be willing to compromise on other sectors. But suppose we have a trade deal tomorrow, and then the federal court rules that IEEPA tariffs are inadmissible, upholding the US CIT court's decision. Then, what happens to the trade deal? These deals are being made on the assumption that IEEPA tariffs will continue. But if the appeals court, or even the Supreme Court, rules otherwise, then none of these trade deals would make sense. What kind of deal are you cutting under those circumstances?
The way markets are digesting tariff news seems a little different this time. We aren't seeing a surge in gold prices or the dollar index, and emerging market sentiment is holding up relatively well. How do you see the dollar moving from these levels, particularly with regard to its impact on emerging market sentiment?
Jahangir Aziz:
I look at the US dollar and 10-year
treasury
yields through the lens of my experience working with emerging market countries. I'm not suggesting the US is an emerging market—far from it. The US probably has the best private sector in the world. However, looking at it from this perspective, consider this: the US fiscal deficit for fiscal year 2025 is projected to be around 6.2%, and for 2026, it could be around 7.2%.
Live Events
At the same time, the US is seeking to impose tariffs to address its trade balance, which is expected to decrease from 4% to about 3.5% due to tariffs. Here's the situation: the US is increasing its fiscal deficit by 1% while also reducing its current account deficit by 0.5%, meaning its foreign borrowing will decrease. To make up for this, the US needs to find 1.5% of GDP in increased domestic savings. If this were an emerging market country, we'd expect bond yields to rise and the exchange rate to depreciate. So, with the increase in fiscal deficit and reduced foreign borrowing, the US might experience higher yields and a weaker dollar, as the government's actions increase the risk premium on the country. This is how I see the dollar and US yields moving.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Mint
21 minutes ago
- Mint
Indian rupee, bond markets cautious in week dominated by Fed, tariffs
By Dharamraj Dhutia and Jaspreet Kalra MUMBAI, July 28 (Reuters) - The Indian rupee and government bonds will react to a host of cues this week, including a U.S. Federal Reserve policy decision and the August 1 reciprocal tariff deadline, which is likely to keep traders cautious. The rupee closed at 86.5150 against the U.S. dollar on Friday, down 0.4% on the week, as foreign portfolio outflows and uncertainty over a U.S.-India trade agreement kept sentiment tepid. While the Fed is widely expected to keep rates unchanged on Wednesday, investors will pay close attention to commentary from Fed Chair Powell to gauge the outlook for U.S. policy rates. "As long as the jobs picture holds up, firmer inflation may well delay the restart of the Fed easing cycle and provide the dollar with a lift this summer," ING said in a note. Later in the week, data on the U.S. labour market will be in focus alongside an inflation print to gauge how tariffs are affecting the world's largest economy. Meanwhile, the deadline to strike trade deals with the U.S. elapses on August 1. Over the weekend, the United States and the European Union announced a deal, which will result in a 15% tariff on EU goods, half what Trump had threatened to impose from August 1. Japan and the European Union have reached agreements with U.S., alongside others such as Indonesia and Vietnam, even as India's negotiations have appeared to run into roadblocks over key sectors such as dairy and agriculture. Traders reckon that the rupee will continue to hold a slightly bearish bias and hover in a 86.30-87 range in the near term. Heightened risk of "news-led price action" should prompt speculators to keep positions small with tight stop-losses, a trader at a foreign bank said. Meanwhile, India's 10-year benchmark 6.33% 2035 bond yield , which settled last week at 6.3505%, is expected to move in a range of 6.31% to 6.38%. Apart from the Fed guidance, focus will also remain on expectations about any potential rate cut in the RBI's upcoming policy decision, due on August 6. A plunge in India's retail inflation to a more-than-six-year low in June, along with expectations that it will slip to a record low in July, has led to increased talks of a rate cut, with some even expecting action next week. The central bank slashed its key interest rate by a steeper-than-expected 50 bps last month and changed its policy stance to "neutral" from "accommodative", which had fueled speculation that the rate cut cycle may be over. Banks will also gauge the liquidity situation and movement in overnight rates after a volatile last week, which saw rates rising beyond the Marginal Standing Facility rate. Foreign investors have been on the buying side, with net purchases of over 100 billion rupees in the last five weeks, as bets of at least one more rate cut have risen. India's fundamental story remains intact. Inflation is under control and fiscal health is in check, and India is one of the large benchmark weights within the JPMorgan emerging market debt index, said Jean-Charles Sambor, head of emerging markets debt at TT International Asset Management. "We think that fundamentals will remain very attractive for foreign investors." KEY EVENTS: India ** June fiscal deficit - July 28, Monday (3:30 p.m. IST) ** June industrial output - July 28, Monday (4:00 p.m. IST)(Reuters poll - 2.4%) ** July HSBC manufacturing PMI - August 1, Friday (10:30 a.m.) U.S. ** July consumer confidence - July 29, Tuesday (7:30 p.m. IST) ** April-June GDP advance - July 30, Wednesday (6:00 p.m. IST) ** Federal Reserve monetary policy decision - July 30, Wednesday (11:30 p.m. IST)(Reuters poll - rates unchanged) ** Initial weekly jobless claims for week to July 21 - July 31, Thursday (6:00 p.m. IST) ** June personal consumption expenditure index, core PCE index - July 31, Thursday (6:00 p.m. IST) ** July non-farm payrolls and unemployment rate - August 1, Friday (6:00 p.m. IST) ** July S&P Global manufacturing PMI final - August 1, Friday (7:15 p.m. IST) ** July ISM manufacturing PMI - August 1, Friday (7:30 p.m. IST) ** July U Mich sentiment final - August 1, Friday (7:30 p.m. IST) (Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Vijay Kishore)
Mint
21 minutes ago
- Mint
EU reaches tariff deal with US to avert painful trade blow
The US and European Union agreed on a hard-fought deal that will see the bloc face 15% tariffs on most of its exports, including automobiles, staving off a trade war that could have delivered a hammer blow to the global economy. The pact was concluded less than a week before a Friday deadline for President Donald Trump's higher tariffs to take effect and was quickly praised by several European leaders, including German Chancellor Friedrich Merz and Italian Prime Minister Giorgia Meloni, who called it 'sustainable.' Trump and European Commission President Ursula von der Leyen announced the deal Sunday at his golf club in Turnberry, Scotland, although they didn't disclose the full details of the pact or release any written materials. The 15% rates will take effect Aug. 1, according to a US official. 'It's the biggest of all the deals,' Trump said, while von der Leyen added it would bring 'stability' and 'predictability.' US equity futures climbed, with S&P 500 contracts rising 0.4% after the index notched its fifth-straight all-time high on Friday. The deal would leave EU exports facing much higher tariffs than the bloc would charge for imports from the US, with von der Leyen saying the aim is to rebalance a trade surplus with the US. But those kinds of tradeoffs in the agreement angered some European industry groups, with Germany's main lobby saying it 'sends a fatal signal to the closely intertwined economies on both sides of the Atlantic.' Von der Leyen and Trump also differed on some of the key terms of the deal they announced. The US president said the tariff level would apply to 'automobiles and everything else,' but not pharmaceuticals and metals. The chief of the EU's executive arm said later at a news conference that the 15% rate would be all inclusive, wouldn't stack on top of industry-specific tariffs and would cover drugs, chips and cars. Metals duties 'will be cut and a quota system will be put in place,' she said. 'We have 15% for pharmaceuticals. Whatever the decision later on is, of the president of the US, how to deal with pharmaceuticals in general globally, that's on a different sheet of paper,' von der Leyen said, adding that the overall rate 'is not to be underestimated but it was the best we could get.' Senior US officials later said that the two sides agreed on a 15% tariff level for the EU's pharmaceutical exports. A separate Section 232 probe on pharmaceuticals is still coming over the next three weeks, but the EU tariff level will remain at 15%, the officials added. The EU agreed to purchase $750 billion in American energy products, invest $600 billion in the US on top of existing expenditures, open up countries' markets to trade with the US at zero tariffs and purchase 'vast amounts' of military equipment, Trump said. Von der Leyen said no decisions have been made on European wine and spirits, but the matter would be sorted out soon. Key to getting the 15% rate to apply to pharmaceuticals and semiconductors was the bloc's promise to make US investments, according to people familiar with the matter. Ahead of the meeting, the EU was expecting a 15% charge on its imports to also apply to most pharmaceuticals. The products had been one of the negotiation's main sticking points. Without a deal, Bloomberg Economics estimated that the total US average effective tariff rate would rise to nearly 18% on Aug. 1 from 13.5% under current policies. The new deal brings that number down to 16%. The deal doesn't cover the EU's steel and aluminum exports, which will remain subject to 50% tariffs, according to senior US officials. Aerospace tariffs, meanwhile, will remain at 0% pending the outcome of a Section 232 probe, the officials added. Officials had discussed terms for a quota system for steel and aluminum imports, which would face a lower import tax below a certain threshold and would be charged the regular 50% rate above it. The EU had also been seeking quotas and a cap on future industry-specific tariffs. For months, Trump has threatened most of the world with high tariffs with the goal of shrinking US trade deficits. But the prospect of those duties — and Trump's unpredictable nature — put world capitals on edge. In May, he threatened to impose a 50% duty on nearly all EU goods, adding pressure that accelerated negotiations, before lowering that to 30%. The transatlantic pact removes a major risk for markets and the global economy — a trade war involving $1.7 trillion worth of cross-border commerce — even though it means European shipments to the US are getting hit with a higher tax at the border. The goals, Trump said, were more production in the US and wider access for American exporters to the European market. Von der Leyen acknowledged part of the drive behind the talks was a reordering of trade, but cast it as beneficial for both sides. 'The starting point was an imbalance,' von der Leyen said. 'We wanted to rebalance the trade we made, and we wanted to do it in a way that trade goes on between the two of us across the Atlantic, because the two biggest economies should have a good trade flow.' The announcement capped off months of often tense shuttle diplomacy between Brussels and Washington. The two sides appeared close to a deal earlier this month when Trump made his 30% threat. The EU had prepared to put levies on about €100 billion ($117 billion) — about a third of American exports to the bloc — if a deal wasn't reached and Trump followed through on his warning. US and European negotiators had been zeroing in on an agreement this past week, and the decision for von der Leyen to meet Trump at his signature golf property brought the standoff to a dramatic conclusion. The EU for weeks indicated a willingness to accept an unbalanced pact involving a reduced rate of around 15%, while seeking relief from levies on industries critical to the European economy. The US president has also imposed 25% duties on cars and double that rate on steel and aluminum, as well as copper. Several exporters in Asia, including Indonesia, the Philippines and Japan, have negotiated reciprocal rates between 15% to 20%, and the EU saw Japan's deal for 15% on autos as a breakthrough worth seeking as well. Washington's talks also continue with Switzerland, South Korea and Taiwan. Trump said he is 'looking at deals with three or four other countries' but 'for the most part' others with smaller economies or less significant trading relationships with the US would receive letters simply setting tariff rates. Earlier: Trump Says Countries Will Face Tariffs Ranging From 15% to 50% Trump announced a range of tariffs on almost all US trading partners in April, declaring his intent to revive domestic manufacturing, help pay for a massive tax cut and address economic imbalances he has said are detrimental to US workers. He put them on pause a week later when investors panicked. Trump's decades-old complaints about the global trading system heap particularly sharp scorn on the EU, which he has accused of being formed to 'screw' the US. The bloc was established in the years following World War II in order to establish economic stability on the continent. The president has lashed out at non-tariff barriers for American companies to do business across the 27-nation bloc. Those include the EU's value-added tax, levies on digital services, and safety and environmental regulations. Weeks of negotiations tested the EU's willingness to digest what is seen as an asymmetrical outcome, a senior EU diplomat said, but one that offers an opportunity to continue the talks without escalating further. --With assistance from Michael G. Wilson, Skylar Woodhouse, Katharina Rosskopf, Kasia Klimasinska, Sam Kim, Jorge Valero, Jenny Leonard, Tommaso Ebhardt, Arne Delfs, Se Young Lee and Richard Bravo.
Time of India
35 minutes ago
- Time of India
Kim Jong Un's sister dismisses South Korea's peace proposals, calls it 'miscalculation'
North Korea has no interest in any policy or proposals for reconciliation from South Korea, the powerful sister of its leader Kim Jong Un said on Monday in the first response to South Korean liberal President Lee Jae Myung 's peace overtures . Kim Yo Jong , who is a senior North Korean ruling party official and is believed to speak for the country's leader, said Lee's pledge of commitment to South Korea-U.S. security alliance shows he is no different from his hostile predecessor. Explore courses from Top Institutes in Please select course: Select a Course Category CXO Leadership Cybersecurity Finance Product Management Operations Management MCA Management Others Data Science Healthcare Digital Marketing Public Policy Data Science Technology PGDM others Degree Artificial Intelligence Design Thinking healthcare MBA Project Management Data Analytics Skills you'll gain: Operations Strategy for Business Excellence Organizational Transformation Corporate Communication & Crisis Management Capstone Project Presentation Duration: 11 Months IIM Lucknow Chief Operations Officer Programme Starts on Jun 30, 2024 Get Details Skills you'll gain: Digital Strategy Development Expertise Emerging Technologies & Digital Trends Data-driven Decision Making Leadership in the Digital Age Duration: 40 Weeks Indian School of Business ISB Chief Digital Officer Starts on Jun 30, 2024 Get Details Skills you'll gain: Customer-Centricity & Brand Strategy Product Marketing, Distribution, & Analytics Digital Strategies & Innovation Skills Leadership Insights & AI Integration Expertise Duration: 10 Months IIM Kozhikode IIMK Chief Marketing and Growth Officer Starts on Apr 7, 2024 Get Details Skills you'll gain: Technology Strategy & Innovation Emerging Technologies & Digital Transformation Leadership in Technology Management Cybersecurity & Risk Management Duration: 24 Weeks Indian School of Business ISB Chief Technology Officer Starts on Jun 28, 2024 Get Details "If South Korea expects to reverse all the consequences of (its actions) with a few sentimental words, there could be no greater miscalculation than that," Kim said in comments carried by official KCNA news agency. by Taboola by Taboola Sponsored Links Sponsored Links Promoted Links Promoted Links You May Like Tan Tao A: Unsold Furniture Liquidation 2024 (Prices May Surprise You) Unsold Furniture | Search Ads Learn More Undo Lee, who took office on June 4 after winning a snap election called after the removal of hardline conservative Yoon Suk Yeol over a failed attempt at martial law, has vowed to improve ties with Pyongyang that had reached the worst level in years. As gestures aimed at easing tensions, Lee suspended loudspeaker broadcasts blasting anti-North propaganda across the border and banned the flying of leaflets by activists that had angered Pyongyang. Live Events Kim, the North Korean official, said those moves are merely a reversal of ill-intentioned activities by South Korea that should never have been initiated in the first place. "In other words, it's not even something worth our assessment," she said. "We again make clear the official position that whatever policy is established in Seoul or proposal is made, we are not interested, and we will not be sitting down with South Korea and there is nothing to discuss." There has been cautious optimism in the South that the North may respond positively and may even show willingness to re-engage in dialogue, particularly after Pyongyang also shut off its loudspeakers, a move Lee said was quicker than expected. Still, Lee, whose government is in the midst of tough negotiations with Washington to avert punishing tariffs that President Donald Trump has threatened against a string of major trading partners, has said U.S. alliance is the pillar of South Korea's diplomacy. "Through efforts in the areas of politics, economic security and culture, we will strengthen the South Korea-U.S. alliance that was sealed in blood," Lee said in remarks commemorating the anniversary of the Korean War armistice on Sunday. North Korea also marked the anniversary which it calls victory day with events including a parade in Pyongyang, although state media reports indicated it was at a relatively lesser scale compared to some previous years. The two Koreas, the United States and China, which are the main belligerents in the 1950-53 Korean War, have not signed a peace treaty.
