(en anglais seulement)

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Hello and welcome to our latest video #MacroMemo. As always, we have quite a lot of economic content to cover. We'll talk about tariffs as a starting point. Some small updates to make, though nothing on the scale of the big changes that occurred in early August.

We will talk about the U.S. economy. We are seeing some genuine weakness, in particular in the labor market, and we'll put that into some context.

We’ll spend a moment on international economies, including Canada. We'll talk about long-term yields and the extent to which they're pretty high right now, and yield curves have steepened, and what that all means.

 We'll also just dig a little bit into Argentina, which is not a subject we spend a lot of time on, but just some fascinating things happening there.

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We'll talk a little bit about stablecoins as well, which is a subset of cryptocurrencies and gaining some greater prominence, possibly with some economic implications.

So that's our plan. Let's start with tariffs. On the tariff file, I suppose the big news in recent weeks has simply been that there was a second level of U.S. court that rejected the use of IEEPA tariffs (International Emergency Economic Powers Act).

So the IEEPA tariffs are the ones that have been used by the U.S. White House to apply country-level tariffs. So there are country-wide tariffs on really almost every country in the world. The court has overturned these. For the moment, they are still in effect provisionally, but they are at risk.

The Supreme Court will be the next and I suppose final arbiter to decide whether these get to remain or not.

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To be honest, it's hard to say which way the Supreme Court leans. Let's acknowledge there is the possibility that these tariffs could be rejected permanently. I would just say that when we look at the full set of tariff tools in the toolkit available to the White House, it does look to us as though there are enough other tools that the White House can probably get approximately where it wants to go on tariffs, with or without these IEEPA tariffs specifically. That’s not to say that it would be consequence free.

Conceivably, you'd have to repay the money to companies that paid the IEEPA tariffs. Conceivably it would take months to get these other tariffs lined up, so it could be very consequential if this is enduringly overturned. Nevertheless, if you were to fast forward a year, I would think that you would see tariffs approximately where the White House wants them.

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We think that's about where they are right now. So, that's the big tariff news.

I guess you could say there were a few other smaller developments, some new tariffs added. One would be that the U.S. eliminated its de minimis exemption for all countries. That is to say, it used to be any product worth less than $800 could come into the U.S. without tariffs and without even much of a customs inspection.

That's no longer the case. That affects a lot of small international businesses and a lot of American consumers who count on those businesses.

I can say steel aluminum tariffs broadened. So the 50% rate now applies just to more things. A lot of finished products that include steel and aluminum will now be partially tariffed.

And perhaps the third development would be India.

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India's tariffs rose from 25 to 50% on U.S. displeasure that India is still buying a lot of oil from Russia. And so broadly speaking, tariffs are still working their way higher, but with a big legal question mark, at least in the short term.

Let's turn to the economy – and of course, this is still very tariff-informed. We are seeing some genuine U.S. economic weakness right now.

The big news is that the U.S. job numbers for the month of August were just released, and added only 22,000 jobs in August. That was less than a third of what had been expected. Equally startling was that the June numbers, which are now a few months old, but the June numbers were revised such that they are now negative.

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There was a loss of 13,000 jobs in June. That's the first negative month dating right back to 2020, and so hardly a common occurrence.

It is important to put some of this into perspective. U.S. population growth has slowed quite profoundly in a way that you don't need that much job creation to keep an even keel. And so that's worth keeping in mind.

Do note that when we reference other employment surveys, be they the household survey, be they the ADP survey or even weekly jobless claims, they show some softening, they're not as bad. And so that tempers the interpretation as well. And maybe when push comes to shove, you look at the unemployment rate and you see an unemployment rate that has risen from 4.2 to 4.3%.

So it speaks to weakness, speaks to a deterioration, but the unemployment rate is hardly high. It's a pretty normal-looking rate. In fact, we would say, but it does show some economic deceleration. So that's what we think we're seeing here.

I would say that when we look at other economic indicators in the U.S., the ISM (Institute for Supply Management) manufacturing index still soft, but it's been soft for years.

00:04:36:01 - 00:05:48:09

It actually rose a little bit in August. The ISM Services Index, which is the other majority of the economy, actually rose pretty nicely. Looks decent.

We look at the Beige Book, which is a qualitative survey. It was, I would say flat too, showing modest growth and so on the whole, certainly some weakness, with some contradictions.

An economic deceleration of sorts is happening, we think, but not a collapse. And we're not forecasting recession as it stands right now. That said, the Fed is likely to cut (interest rates). September 17th is the next rate decision. The market has gone from debating cut or no cut, to complete conviction in a cut and debating would it be a 25 basis point or a 50 basis point cut?

For now, a 25 (basis point cut) does look significantly more likely. But the market is more than happy, and pricing in just about full probability of a further cut in October, another one in December and actually close to six rate cuts over the next year, which is a real change from just a few months ago.

And, you know, when you combine some economic weakness, with perhaps some slight politicization of the Fed, or at least some pressure to that effect, it doesn't seem unreasonable to think there could be a fair amount of cutting. I might say perhaps not quite as much cutting as the market currently has priced in.

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Okay, let's turn from the U.S. to a quick round the world tour here. And I really mean quick, so we'll start with France.

So it looks as though France will need a new prime minister and that is over budgetary issues. Some austerity was proposed. It did not go over well with the public or with the other parties.

As a result, again there will have to be another prime minister selected. In fact, it will be the fifth in two years, speaking to a certain amount of dysfunction. Their bond market may not be entirely pleased because the next prime minister, simply to survive, is less likely to do as much austerity. So less austerity, meaning the French fiscal position probably remains somewhat challenging.

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In Germany, well, there's certainly been some optimism in Germany. Germany, of course, is eliminating or changing its fiscal brake and promising more military spending and more infrastructure spending and all that is true. And I think we can talk about somewhat more growth in Germany over time. But the reality is, right now, we're still seeing economic weakness.

German factory orders were down almost 3% in the latest month. Exports were down slightly in the latest month. It’s certainly not an economy that's flying forward.

Japan, well, in a sense similar to France, perhaps, in the sense that Japan's prime minister (PM) just resigned about 24 hours before I'm saying these words on September 7th. That's not to say there will be an election.

The next prime minister will be chosen by the ruling Liberal Democratic Party. And it’s a somewhat similar story in the sense that the existing PM was engaging in some mild austerity. The next prime minister is expected to allow some extra spending, and perhaps put extra pressure on the Bank of Japan to keep rates low. Markets are, for the moment, helpful, though of course it is important to get fiscal houses in order.

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And then Canada. Canada had also, like the U.S., quite a weak jobs number in August, in fact. Significantly worse, there was the loss of 65,000 jobs. The unemployment rate went up to 7.1%, which is the worst since 2021. So there is some real economic weakness in Canada.

Bank of Canada is pricing just about the majority of a rate cut right now for September 17th as well. So probably at least a bit of rate cutting. We would say there could perhaps be more rate cutting. The market is thinking part of that is because we are seeing broad-based weakness here. At first quarter GDP and Canada shrank.

Second quarter GDP is currently tracking a slight decline as well. I tend to reject the notion that two quarters of decline is a recession. But I will say it's certainly weakness. And when you're losing jobs, on a trend monthly basis at the same time, it doesn't speak to a very strong economy. It is frankly disappointing because Canadian tariffs have come in lighter than feared.

We thought perhaps there could be some stabilization in the latter part of the summer and into the fall. But it's really not visible at this point in time. We just haven't gotten that yet. Let's turn from economic data to bond yields just for the briefest of moments, really.

Just to acknowledge that we've seen this pretty remarkable steepening of yield curves over the last couple of years, but certainly including the last six months or so. Thirty-year bond yields in particular have risen or have failed to decline as much as one might normally have expected.

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And it's not just a U.S. story. The U.S gets a lot of that attention. It's also very true in the UK and France and Germany and in Japan, as well. And it's all the more curious because of course central banks have been cutting rates. So the short-term interest rates have been falling, long-term interest rates have either been rising or resisting decline.

And that's not the normal state of affairs. Usually when you see long-term yields misbehaving, there are a couple of possible answers. One is sometimes inflation expectations are rising. There is a little bit of that, but really not much. That is not the main force.

It seems to us much more to be via the term premium channel and fiscal concerns and that sort of thing. That makes sense because all of those countries have fiscal excesses to varying degrees. And so the bond market is really just demanding higher compensation for that kind of long-term risk. We see a number of countries with 30-year yields that are really not much below or in some cases a bit above 5%, which is a pretty substantial rate.

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Of course, it becomes quite expensive to service debt at that rate and that sort of thing. And, you know, the bond market is simply more alert. As we look forward, we think these steeper yield curves likely persist. And it will be difficult for long-term yields to come down, at least unless there is some notable austerity.

Okay. I want to spend a moment on Argentina now. And so just to justify this, this is a little bit off the beaten path for most of our conversations. Do note Argentina is the third-largest economy in Latin America, after Brazil and Mexico. So it is a very significant economy. It is also a country with a long history of economic dysfunction.

And so that has continued until very recently. The debate is whether that might now be ending or not. It did get a new prime minister in the form of Milei in December 2023, so just under two years ago. And, you know, he has implemented, as promised, as advertised, a pretty radical agenda.

The question is, is it working? Is Argentina turning a corner in a way that can allow faster growth and getting rid of all that hyperinflation, and fixing fiscal excesses and, and serial defaults?

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The answer is tentatively, yes. But, and this is arguably unavoidable, it's a painful process. We've seen harsh fiscal austerity to balance the budget that's getting an endorsement from the IMF (International Monetary Fund). It's not clear. It's all sustainable in the sense that they've cut transfers to the provinces. What are they going to do now? And so on.

Nevertheless, they have managed to hack away at the deficit. They have done some significant deregulation, which arguably is just an engine for more growth. They have stopped or at least greatly reduced the amount of money printing. They used to finance their deficit just by printing money. It created hyperinflation. That is down by a lot.

It's gone from triple digit to double digit inflation. The economy seems to be returning to growth this year, perhaps even growing at a 5% rate, which would be quite good if true. It looks like after an initial spike in poverty under the new Milei government, as some of these harsh reforms were implemented, it looks like the poverty rate is now 38%, a little bit lower than the 42% rate that prevailed before he came in.

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And so there is some real success here. It is coming at the cost of higher unemployment in the short term with higher political dissatisfaction. In fact, he just had a setback at the polls. And so it is unclear the extent to which this can continue. But I think it is right to view it as bitter medicine, as starting to work, as really making important differences in the fiscal balance and inflation, perhaps in the poverty rate.

Let's just see if he can retain enough political power to continue on that way and perhaps, return Argentina to a more functional country that can grow. It’s really of some importance,  because if Argentina can do it, it would be very promising for all the other countries that are really stuck and stuck in a middle income trap or worse, and not converging on developed world living standards. Maybe there's a path forward.

We will see, but certainly fascinating.

Lastly, and briefly, stablecoins. And so just to give you a quick run-through here, stablecoins are a type of cryptocurrency. But unlike say Bitcoin, they are set at a fixed exchange rate to the dollar. So you buy Bitcoin and it can go up a lot.

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It can go down a lot. You can get rich, you can get poorer. It swings wildly. In the case of stablecoins, they are in theory fixed to a standard currency like the U.S. dollar. And so they still offer the advantage of cryptocurrencies, which is just low-friction digital transactions, but a more stable base. And your money isn't going up and down as you're trying to make those transactions.

As a result of that, they're also well-suited to host some fancy things like programing and tokenizing assets and some other complicated things like that, that are quite attractive in theory. The White House is a fan of stablecoins. In fact, their recent GENIUS Act set up a regulatory framework to allow the greater use of these and to encourage the U.S. dollar to be the dominant, stablecoin linked currency.

Unlike Bitcoin, which envisions sort of a utopian world and a different inflation rate and this sort of thing. Stablecoins don't do that. They take whatever inflation rate the economy brings.

From an economic standpoint, if you're an optimist, you might say if transactions can be done more quickly and more cheaply, perhaps there's an efficiency to be gained.

Perhaps capital can be allocated more democratically. That's a potential efficiency, though it is a little bit pie in the sky. Conversely, more illegal activities because all these cryptocurrencies are pseudo anonymous.

Bond market distortions: stablecoins, for the most part, hold T-bills as their underlying asset. And so people want a whole lot of stablecoins and suddenly T-bill purchases go through the roof. And then if they want to sell them, suddenly people are selling them.

There is the risk that short-term yields are unnaturally low, the risk that short-term yields are unnaturally volatile, which could be consequential. There could be trillions of dollars of these things if it were to really succeed.

There's also a big risk to financial institutions if these things are cheaper at doing purchases and transactions and store value. Those are things that banks do as well. There are some big question marks there too, and so we'll see where this goes.

There is absolutely some upside to it in terms of growth of usage of stablecoins. Some pundits argue this will become a multi-trillion-dollar market within just a few years. We'll take the under on that. I think it'll grow. I'm not sure it'll grow quite that quickly, but it does have some attractive features.

Let's see where it goes and let's appreciate it's not exactly the same as a Bitcoin, where the value is moving around. It's not really a haven for speculators either.

Okay, I'll stop there. Hopefully you found something of use and something of value in all of that. Thanks so much for your time. Please tune in again next time.