| This newsletter is also available in podcast format. It can be found here Markets and Economics RSA US Tariff on SA Exports: The US’s new 30% tariff is impacting South African exports, leading the government to respond with strategic trade initiatives and negotiations. The move is expected to weigh on export volumes and local growth.  If one breaks down exactly what is being exported by RSA to the US, one gets the following picture:  Note that Platinum and other important minerals are explicitly excluded from the tariffs. Rand Weakness amid Coalition Uncertainty: High political uncertainty, especially risk of a breakup in the DA-ANC governing coalition, has created forex volatility, raising risks of fuel price increases and making imports more expensive. Right now the exchange rate is back down to a more manageable R17.50 range, but that can change quickly. Manufacturing PMI Expansion: The Absa Purchasing Managers’ Index moved back into expansionary territory with demand rebounding in July 2025, indicating improved business conditions after a lengthy slump. This is good news for the economy. Agriculture Outperforms: Agriculture has consistently outperformed the rest of the SA economy, maintaining growth despite rising input costs, and remains a key support for broader economic stability. Modest Inflation, Rates on Hold: South African inflation remains modest, with the SARB cutting rates in July to 7%. USA: S&P 500 and Nasdaq All-Time Highs. US equity markets hit new closing highs driven by expectations of a Federal Reserve rate cut, with tech companies at the top of the leader board. Market Concentration in Mega-Caps: Valuation increases are concentrated in just five mega-cap stocks, notably Nvidia, following eased restrictions on AI chip sales to China. Meanwhile, US small-cap stocks are seen as attractively valued but underperforming. Economic Slowdown Concerns: US economic data indicate a slowdown in consumption, rising producer prices, and cracks in the labour market (which we spoke about last week). Fed Rate Cut Expectations: Dovish Fed signals and weaker-than-expected jobs data have led investors to fully price in a 25 basis-point rate cut – but the PPI shows that those long-anticipated inflation pressures are coming down the pipe. Mortgage and retail sales figures continue to show moderate growth but little acceleration. Global: Tariffs Trigger Global Volatility: US tariffs are shaking up global trade, causing currency swings, supply chain and investment risks, and a revised global trade order as multilateral negotiations intensify. WTO Upgrades 2025 Trade Forecast: The WTO has revised its global merchandise trade growth forecast for 2025 up to 0.9%, but warns of significant risks and slower growth in 2026 due to (largely US) protectionism. Global Equity Volatility: Equity markets have been volatile globally, with long-dated US Treasury yields falling and investors reassessing risk amid shifting geopolitical and trade dynamics. Gold and Oil Price Volatility: Gold prices rebounded above $3,380/oz after an initial fall, while oil prices posted gains due to hopes for a ceasefire in Ukraine and easing global trade tensions. Emerging Market Opportunities: Despite global growth uncertainties, earnings forecasts for emerging markets (especially outside Asia) are rising, offering selective opportunities for long-term investors.  Stats back in the spotlight – this time it’s inflation Last week, Scott Bessent, the US Treasury secretary, told a televised audience that: “if you look at any model” for the Fed funds rate, it suggests that “we should probably be 150, 175 basis points lower.” This is breathtaking and deeply disappointing from a man who initially held such promise. We have often spoken about the Fed and the need for its independence, for good reason. If the Fed breaks, so goes the US monetary stability – and that will be felt right across the world. Remember the bond turmoil that resulted in April when the Thirty-year bond surged over 5%? It was the only thing that brought some sanity back to the White House, and resulted in the TACO (Trump Always Chickens Out) tariff backdown. Unfortunately, the ever thin-skinned Trump hated that Acronym and we haven’t seen much backing down since. With the current effective Fed funds rate at 4.33%, Bessent is suggesting that it should be about 2.6%. Over the last 70 years, the rate has never been that low with inflation as high as it currently is (with the core reading above 3%). So, apparently, “any” model now shows that US monetary policy has been misguided throughout that entire period and needs to be changed: In fact, it’s easy to find a model that says fed funds should be far higher than 4.25-4.5%. Let’s have a look at the Taylor Rule. Named for John Taylor, a Stanford economist and former senior Treasury official who was a candidate for the Federal Reserve chairmanship eight years ago. His formula suggests the next move should in fact, be up, and not down. The Taylor rule is a monetary policy guideline that provides a formula for setting the appropriate short-term nominal interest rate based on economic conditions. Proposed by economist John Taylor in 1992, it links the central bank’s interest rate decisions to two main factors:The difference between actual inflation and the target inflation rate.The difference between actual economic output (GDP) and potential output (the output gap).The rule suggests that the central bank should raise interest rates when inflation is above target or when the economy is growing faster than its potential, and lower rates when inflation is below target or when the economy is growing slower than potential.  Bessent, of course, has every right to express his opinion, but it’s absurd to suggest that “any” model would call for fed funds to be so much lower, especially from someone with his academic background, and alarming to hear it from the US Treasury secretary. We all know what’s going on here, he’s orange nosing his boss, (to what end? Is history going to treat him kindly? Probably not.) Donald Trump wants lower interest rates and more control over them. Fed independence has long been contested, and we have often spoken about it in this newsletter. The obvious drawback of allowing the Treasury Department to control both fiscal and monetary policy is that it can then coordinate them to rhyme with the political cycle. In the UK, finance ministers set base rates until 1997, creating a pronounced “stop-go” effect as governments pumped up the economy ahead of an election, and put on the brakes once they’d been re-elected. This is miserable economics, as the UK’s weak postwar growth demonstrates, but decent politics. Even so, that implies that it’s madness for a government to behave like this six months into a four-year term. The likely outcome would be a short-term boom, and a pretty serious bust in time for the next election in 2028. The US desperately needs to bring down the treasury yields, the interest payments are eye-watering, and with so much debt due to be ‘rolled over’ – with a weak demand already displayed at recent auctions, long term debt can’t really be rolled over at these historically high rates without making the interest repayments even more of a problem going forward. All else being equal, lower overnight rates from the Fed mean lower longer-term yields. But the Fed doesn’t control the long end; bond markets do that.  The White House has also been clear that it wants a weaker dollar. The latest dose of pressure on the Fed appears to have achieved this, as the currency has fallen over the last few days. The graph below, the DXY Index, is the most popular method to gauge USD strength/weakness. The neutral point is 100.  DXY INDEX That’s helpful for many people, but particularly for the emerging markets, where stocks have at last taken out the high they made during excitement over China in early 2021. The Rand/Dollar is coming back to the ‘comfortable (post pandemic)’ R17:50 level again. For now, the impact is clear as investors are persuaded that there is no recourse but to continue buying US stocks. Lowering interest rates can be expected to continue to bolster US markets.  Gold bugs still hanging on Bullion, the quintessential haven asset, has been range-bound since Liberation Day.  Policy uncertainty remains high, but it has at least escaped the Trump 2.0 tariff crosshairs. Washington has clarified that gold will not be subject to levies after US Customs officials briefly threatened to impose a full 39% on imports of the metal from Switzerland – we spoke about that last week. The gold price has nearly doubled in three years, and the incessant attacks on the Fed’s credibility have only strengthened its appeal. The rally is ultimately a function of trust in the Fed, or rather, lack of it. The past few months emphasised bullion’s credentials as a store of value even as its distant cousin, Bitcoin, enjoyed a good run. Over the years, there has been a debate as to whether Bitcoin is a currency, a store of value, a speculative investment, or all three. This has been one of the first times we can compare gold and bitcoin as safe havens when ‘the chips are down’ Since Inauguration Day, gold (especially gold miners) has performed slightly better of the two. Both havens are easily outperforming the S&P 500 at a time when it’s on a big bull run.  Bitcoin hit yet another all-time high in last Wednesday’s trading, buoyed by a raft of crypto-friendly regulations that are likely to spur more institutions to get involved. It’s hard to gauge how much institutional adoption helps, but this could show up in declining price volatility. Ukraine War and Gold There’s another golden point worth making as the world prepares for Vladimir Putin and Donald Trump’s meeting in Alaska. The prospect of peace in Ukraine has created minimal impact on global markets, largely because the war has been dismissed as a stalemate since late in 2022. Below is an interesting graph to have at hand as we watch the fallout from these Putin/Trump talks. Early reports indicate that the talks were a ‘nothing burger’ and Zelensky is due to make another trip to the White House this week. There is no talk of a ceasefire having been agreed, and by all accounts, Putin is digging in his heels, and he wants the whole of the Donbas (half of which he doesn’t control, and Ukraine has lost thousands of souls defending). No talk of returning the thousands of Ukrainian children that were stolen and given away to party favourites (and for which Putin is a wanted criminal by the CCJ). There has been much talk about a ‘land swap’ – but there is only one person that has taken land to swap with – so how does that work? Russia wants all the land it now occupies or semi-occupies (striped red), which has effectively cut Ukraine off from the Black Sea completely. In other words, hand over everything to Russia and hope that it’ll stop further invasion. Without Ukraine in the discussion (let alone NATO), these talks are a non-starter.  Politics aside, Putin’s invasion of Ukraine may have had the lasting effect of boosting gold’s status. By launching the Ukrainian war, Russia changed the global geopolitical equilibrium and created a bipolar (or even multipolar) world. As a result of that (and subsequent sanctions), trust in the international financial system broke down with certain parties (i.e. BRIC countries, and so on) looking for alternative “reserve assets” (stores of value). Often, that has been gold. For circumstantial evidence that this has happened, look at the ratio of the gold price to the other tradional reserve, US Treasuries  These are the two clearest and most proven shelters available to the world’s investors. It certainly looks as though gold’s advantages suddenly became much greater once the world had witnessed a return to war on the ground in Europe. For another way to look at this, the gold price is usually sensitive to the real yield on bonds. The metal pays no yield. Thus, the lower the real yield on bonds, the higher the gold price can go, and vice versa. Until recently, that is, is this long-standing relationship broken? The fact is that the world has not been fiscally dominated since the graph’s inception. Monetary policy was at play, which at its core requires recession to reset economic cycles. Not so in a fiscally dominated world. Here, the government decides.  |
| PPI Producer Price Index The latest US Producer Price Index (PPI) data showed inflationary pressures accelerating more than expected. The Producer Price Index, effectively the wholesale price index, is seen as a leading indicator of CPI. In July 2025, the PPI for final demand rose 0.9% month-on-month (it was only expected to be 0,3%), the largest gain since June 2022—pushing the annual rate to 3.3%. This increase was broad, led by surging prices for both goods and services, and signals that cost pressures are building throughout the supply chain. The spike was primarily driven by trade services and food prices, with machinery and equipment wholesaling up sharply. The implications are significant: higher producer prices foreshadow a likely pass-through to consumer inflation in the coming months and complicate the Federal Reserve’s timetable for any potential interest rate cuts (just as there were strong indications that a rate cut was coming in September). Markets are concerned that these rising input costs, partly driven by recent tariffs, will soon filter down to consumers, ending a period of relative stability and possibly forcing policymakers to rethink their stance on inflation and rates. This PPI print also vindicates Powell’s wait-and-see stance on inflation and interest rates. DATA COLLECTION ISSUES The BLS (Bureau of Labour Statistics) agency has suffered years of underfunding under both Republican and Democratic administrations, a situation worsened by an unprecedented campaign by President Donald Trump’s White House to remake the federal government through deep spending cuts and mass layoffs of public workers.  The resource constraints have impacted the closely watched employment report and also resulted in the suspension of data collection for portions of the CPI basket in some areas across the country. This has raised concerns about the quality of the government-produced economic data, long viewed as the gold standard. The nomination of Heritage Foundation economist E.J. Antoni, a critic of the BLS, to head the statistics agency, is also adding another layer of worry over data quality. (He has already said that he might make the all-important non-farm payrolls (an important leading indicator of economic health) only once a quarter, not monthly.) Economists across political ideologies have described Antoni as unqualified for the position. With the PPI and CPI reports in hand, economists estimated the core Personal Consumption Expenditures (PCE) Price Index increased 0.3% in July after a similar gain in June.That would raise the year-on-year increase in the so-called core PCE inflation to 2.9% from 2.8% in June. Core PCE inflation is one of the measures tracked by the Fed for its 2% target. The Fed left its benchmark overnight interest rate in the 4.25%-4.50% range last month for the fifth straight time since December. Some economists said it should only consider cutting rates next month if July producer and consumer price data proved to be anomalies and nonfarm payroll gains remained below 75,000 jobs in August. The US Consumer Price Index (CPI) for July 2025 (that came out on Tuesday) increased by 0.2% on a seasonally adjusted basis, following a 0.3% rise in June. Over the past 12 months, the headline CPI rose 2.7%, unchanged from June and slightly below economists’ forecasts. The increase in July was mainly driven by a 0.2% rise in shelter costs, while food prices remained stable and energy prices declined by 1.1%. Core CPI, which excludes food and energy, increased by 0.3% in July, the sharpest rise in six months, and rose 3.1% year-over-year, indicating underlying inflationary pressures, particularly in services such as medical care and transportation. The data suggests that while inflation remains relatively contained overall, some price pressures are building beneath the surface, influenced in part by tariffs and supply chain factors. This mixed inflation picture complicates the Federal Reserve’s outlook on future monetary policy moves. Author: Dawn Ridler  Q2 2025 The US CPI numbers out last week confirmed that the Federal Reserve may very well have the data now to allow them to cut interest rates in September. This doesn’t mean that inflation, post-Trump’s tariffs, are not going to be increasing again. It merely means that inflation is under control for now. The probability of a rate cut has now jumped to 90%. This has fuelled stock prices during the last week, especially in those stocks which are directly linked to consumer markets. Quarter 2 earnings season actually ended up being very strong. Companies showed an 11.8% y-o-y increase in earnings, making it the third consecutive quarter of double-digit earnings growth. Of the companies that have reported so far, 81% beat their expectations, sending these share prices higher. The 5-year average is actually 78% making this period exceptional. If companies happened to miss earnings or guided lower for the rest of the year, investors punished these stocks, sending them lower. Often, these sell-downs have been brutal. Nine of the eleven sectors on the S&P500 beat expectations, led by Communication Services, Information Technology and Financials. There is a narrow band of companies which are pushing up the value of the overall market. With valuations stretched again, many are asking what now for markets are we enter the second half of the year? Jurrien Trimmer from Fidelity shows the graph below. It indicates the average weekly return for the S&P500 since 1926 (left-hand scale). September and October seem to be the seasonally weak months for the market historically. The percentage of weeks that markets have been positive is shown as purple percentages (also read of the right-hand scale). So both September and October give on average negative returns, but happen to be positive between 48 and 56% of the time. So it’s not a foregone conclusion that markets are going to be negative in September and October of 2025.  Look at May. The saying, “Sell in May and go away” seems to have some bearing on reality, especially the beginning months of May. Here, markets on average are down and only 38% of the time ends up being positive. At the same time look at December and January where markets are on average seasonally strong and this has happened up to 74% of the time early in January. The data is really interesting, but the overlay of the world’s Fiscal Dominance at present needs to be taken into consideration as well. We are seeing a lull in bond volatility, which I can only assume is due to US policy makers wilfully controlling the bond market. As I have said before, I don’t think US bond markets are investable at present, given the fiscal cliff that the government is facing. So lower bond volatility must mean an invisible hand is at work. This is not bad news as a calm bond market allows for the US government to potentially start issuing longer-term debt at mass again rather than favour short-term issuances. This is all good for liquidity, which ultimately drives asset markets. Surprised that Bitcoin peaked at $122,000 last week? Don’t be; it’s a liquidity measure, as are equity markets.  Bitcoin price year-to-date Author – Cobie Le Grange EXCHANGE RATES:  The Rand/Dollar closed at R17.61 (R17.74, R18.15,R17.76, R17.72, R17.90, R17.58, R17.89, R17.99, R17.92, R17.77, R17.95, R17.88, R18.04, R18.16, R18.39, R18.64, R18.89, R19.12, R19.10, R18.36, R18.21, R18.18, R18.20, R18.71, R18.35, R18.38, R18.41, R18,67, R18.38, R18.73, R18.03, R18.05, R18.11, R18.21,)  The Rand/Pound closed at R23.84 (R23.84, R24.09, R23.88, R23.76, R24.22, R24.08, R24.49, R24.22, R24.35, R24.05, R24.18, R24.14, R23.95, R24.16, R24.40, R24.82, R25.10, R25.01, R24.73, R23.78, R23.55, R23.52, R23.50, R23.53, R23.19, R23.12, R22.85, R23,16, R22.93, R22.80, R22.99, R22.98, R22.72, R22.99, R22.73, )  The Rand/Euro closed the week at R20.56 (R20.64, R21.04, R20.86, R20.61, R20.93, R 20.70, R20.91, R20.74, R20.68, R20.24, R20,37, R20.27, R20.13, R20.43, R20.78, R21.21, R21.52, R21.72, R20.93, R19.95, R19.72, R19.83, R19.72, R19.41, R19.20, R19.29, R19.02, R19,35, R19.31, R19.23, R19.09, R18.87, R19.19, R18.85, ,)  Brent Crude: Closed the week $66.08 ($66.07, $69.46, $68.29, $69.21, $70.58, $68.27, $67.39, $77.27, $74.38, $66.56, $62.61, $65.41, $63.88, $61.29, $65.86, $67.72 $64.76, $65.95, $72.40, $72.13, $70.51, $70.33, $73.03, $74.23, $74.51, $74.65, $76,40, $77.60, $79.98, $71.00, $72.38, $75.05, $70.87, $73.86, $73.99).  Bitcoin closed at $117,371 ($118,043, $113,608, $118,139, $118,214, $117,871, $108,056, $107,461, $103,455, $105,017, $105,643, $104,049, $103,551, $104,615, $96,405, $94,185, $84,571, $84,695, $82,661, $83,074, $84,889, $82,639, $83,710, $85,696, $96,151, $96,821, $96,286, $99,049, $104,559, $104,971, $99,341, $97,113, $97,950). Articles and Blogs: How to survive volatility in your investments NEW What to do when interest rates drop NEW Difficult Financial Conversations Financial Implications of Longevity Kick Start Your Own Retirement Plan You matter more than your kids in retirement To catch a falling knife Income at retirement 2025 Budget Apportioning blame for your financial state Tempering fear and greed New Year’s resolutions over? Try a Wealth Bingo Card instead. Wills and Estate Planning (comprehensive 3 in one post) Pre-retirement – The make-or-break moments Some unconventional thoughts on wealth and risk management Wealth creation is a balancing act over time Wealth traps waiting for unsuspecting entrepreneurs Two Pot pension system demystified Keeping your legacy shining bright Financial well-being when dealing with Dementia and Alzheimers Weathering the storm Pruning your wealth farm Should you change your investments with changing politics? Taking a holistic view of your wealth Why do I need a financial advisor? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |