Macro Freestyle podcast – Is policy turning more interventionist?
The desk interprets Standard Chartered's analysis as suggesting a shift towards more interventionist policies, potentially influencing inflation and currency dynamics. As Eric Robertsen and Madhur Jha discuss, recent developments in U.S. policy, particularly from the Fed and Treasury, have implications for asset prices and currency valuations in the FX market. Per the full note, the evolving macro landscape may present new trading opportunities, especially considering the current positioning in the EUR/USD, GBP/USD, and USD/JPY pairs. Current consensus targets for EUR/USD are around 1.1700 for March 2026, highlighting a cautious but optimistic view as traders gauge global economic responses to policy shifts.
What the desk is arguing
The desk interprets the Standard Chartered podcast as a signal that global monetary policies may become increasingly interventionist, thereby impacting currency valuations and inflation rates significantly. According to Eric Robertsen, the U.S. policymaking landscape is evolving, which could open doors for currency traders to exploit new opportunities based on shifting macroeconomic fundamentals. Recent discussions suggest upcoming adjustments in Fed and Treasury policies could reshape dynamics across major currency pairs.
A significant point raised in the podcast is the current consensus among various firms, suggesting a median target for EUR/USD around 1.1700 over the next months. This reflects a broad expectation for a gradual appreciation in the euro against the dollar amid shifting economic policies and inflationary pressures.
Where it sits in our coverage
For the EUR/USD, our current consensus target is 1.1700, with the range spanning from 1.1200 to 1.2000, indicating a cautiously bullish sentiment. Notably, stanchart has set a target of 1.1400 for March 2026, aligning closely with other major forecasts such as morganstanley at 1.2000 and rbc at 1.1600 for the same period.
This perspective is somewhat conservative relative to the broader cross-firm consensus, where other institutions like morganstanley project higher valuations, positioning the desk's outlook slightly towards the lower end of the forecast range.
How other firms see it
Several firms, including rbc and hsbc, are aligned with the bullish outlook on GBP/USD with targets hovering around 1.36-1.38, which reflects a supportive stance on the currency in light of expected policy shifts. Conversely, firms like nomura and barclays maintain a more cautious stance on GBP/USD, projecting targets below 1.32, indicating divergence in market sentiment.
The potential crossover effects on USD/JPY should also be monitored, as shifts in U.S. policy directly impact dollar dynamics and could significantly influence Japanese yen valuations amidst ongoing Bank of Japan strategies.
04Market volatility could increase as traders reassess positions ahead of potential policy shifts.
Market implications
Traders should watch for USD performance as U.S. policy evolutions unfold, particularly in the upcoming reports from Federal Reserve meetings. A break above 1.1700 in EUR/USD could signal a shift in market sentiment, while close attention to GDP and inflation data will reveal how these developments square with existing expectations.
Risks to this view
The key risk to this outlook would be a surprising dovish pivot from the Fed that could weaken the dollar across the board, leading to a reassessment of those consensus targets. Additionally, any sudden geopolitical tensions may drive volatility, impacting currency pairs like USD/JPY more dramatically.
Hello, I'm Eric Robertson, Global Head of Research and Chief Strategist at Standard Chartered. And I'm Madhur Jha, Global Economist and Head of Thematic Research also here at Standard Chartered. Welcome to Macro Freestyle, our monthly podcast series where Madhur and I will identify and explore topics that are likely to be most impactful and relevant for financial markets and the global economy.
Welcome everyone for another edition of our podcast, which we are recording on the 3rd of September. We are back after a short summer break. Markets seem to be unsure about the fiscal and monetary policy mix, in particular whether policy is turning more or less interventionist.
So let me begin by asking you, Eric, markets have been quite confused by the lack of policy guidance from the Fed. Do you think that the Jackson Hole speech by Fed Chair Walsh helped to alleviate some of these concerns? Hi, Madhur.
The short answer is yes. I think we will look back on the Jackson Hole speech from Fed Chair Kevin Walsh as a key pivot in his tenure at the Fed. And I think there's two issues.
Number one is that for any new Fed Chair, there is a transition period. The perception of their views as being dovish or hawkish are obviously skewed by previous speeches and research that they have delivered. But you never really know their views until they're in the seat and they're observing the current economic conditions.
Now, all of that was clouded or complicated by the fact that the expectation from the market was that President Trump would exert considerable influence on the Fed once Walsh was in his seat and that that would lead to the Fed being much more dovish than perhaps was appropriate for the economy. What I think Kevin Walsh has done with that Jackson Hole speech is two things. Number one, he has laid out very clearly how he sees the U.S. economy, which I think was a little bit more positive than I think some people had assumed.
He talked about corporate profits being very good, but he also talked about the fact that inflation was higher than they would like and higher than their target. And he was very clear that if inflation persists along this path, ultimately the Fed may have to tighten rates to address that. And I think that marker was incredibly important in not only establishing his framework for how he sees the economy today, but also his willingness to tighten if inflation doesn't come down.
And so, yes, I do think that this was an important first step in making sure that the market was very clear on what his framework is and what his outlook is. And maybe, Eric, staying with this theme of inflation, how do you think markets should look at the evolving growth and inflation dynamic in major markets, not just in the U.S., but in major markets? And what would reassure you that inflation is less of a concern than markets are currently factoring in?
I think the point that we need to start with, Madhu, is the idea that inflation perceptions, inflation expectations, not just in the U.S., but globally have been whipped around by oil prices and by extension by the up and down of the conflict in the Middle East. And I think the volatility of oil prices has exerted a disproportionate amount of influence on those inflation expectations. I think the actual inflation landscape for many major economies around the world, with China being the exception, is that inflation is higher than everybody would like it to be in most cases.
The question is, is that a legacy of the conflict in the Middle East and the impact on the supply chains? Is it a legacy of tariffs? Or is it simply a function of the economic environment?
I mean, Kevin Warsh made an interesting point going back to his Jackson Hole speech, where he basically said, look, we've got very strong business activity and CapEx. And so you could argue that with the resilience of economic activity in a number of economies, that it's perhaps not a surprise that inflation has stayed relatively elevated. Now, I think we're all conditioned to believe that if inflation is above target, that's a bad thing.
And there is an argument that says that we actually are living in a world of better nominal growth. In other words, not only real GDP, but inflation together are pushing, in the case of the United States, nominal GDP above 5%. And if you combine that with really good corporate profits, then perhaps it's not a surprise, and maybe even not such a horrible thing that inflation is staying a little bit elevated.
But I think it presents enormous challenges for the central banks around the world, right? We've just talked about the Fed. We as a team now expect the ECB to hike rates in September.
We expect more hikes from the Bank of Japan, Bank of Korea, et cetera, et cetera. So we are moving into a world where central banks are going to have to keep raising rates. And I think that is going to be a headwind for markets later in the year.
Madhur, how do we think tariffs are still having an impact on inflation dynamics? Do we think tariffs are having an impact on China and its growth and disinflation trajectory? What do we think the current state of play is in this game of tariffs that we've seen?
Thanks, Eric. I think there's been like 16 months now since we had the April 2025 tariff imposition by the US administration. And a lot has happened since then.
But we have enough data to be able to say what the impact has been. And what is very clear is that for the most part, about 95 to 100% of the tariff increases have been absorbed by the US importer. So the rest of the world is still fairly resilient in terms of the impact.
It's largely a US story. And here, the US importer has absorbed, as I said, almost all of it. A lot of it has gone into a compression of their profit margins or their importer margins.
But slowly over about a seven to eight month period, that has been now also passed on to the consumer. Not all of it, estimates vary. And right now, most estimates of the tariff contribution to core PCE, which is really what the Fed has looked at traditionally as the main guide for inflation, they vary from about 0.5 to 0.9 percentage points.
So something around 0.7 percentage points increase in core PCE was due to tariffs. And a lot of this has now faded. But still, inflation has been above what central banks would like it to be.
A lot of that excess core PCE inflation till about Feb, March this year in the US was driven by tariffs. So tariffs clearly was something that added to the inflation issue. Since then, of course, now other factors have taken over.
But the risk is that you could have new tariff impositions and that could start the process again. In terms of the rest of the world, as I said, the direct impact of the tariffs has been more muted. But for China, I think the very interesting dynamic has evolved.
The tariffs on China were higher than for most of the parts of the world. But still, we saw that China export prices to the US or in other words, import prices from China into the US were amongst the lowest. So the disinflation trend persisted from China.
And more recently, both industrial prices and PPI has been rising in China. It turned positive in March, has been rising since then, largely driven by higher commodity prices. And this ended the deflation that we saw for the last three years.
However, if you look at how export prices have been moving out of China, they are still quite muted. They have been rising, but at a much smaller pace and with a greater lag than import prices. And I think there's a couple of reasons for that.
Historically, export prices have lagged, import price increases. We are seeing China seeing some cost pressures building now because of higher commodity prices. But the likelihood of cost-led reflation, including in export prices, still remains quite muted because there is this imbalance between supply and demand in China.
So China's supply capacity has really increased quite significantly because of a number of reasons because of investments, more competition, greater productivity growth. But domestic demand remains still very weak in China. And a lot of that increased supply is being exported, but at very reasonable rates to the rest of the world.
So that disinflation trend, I think, still persists. And we don't see even the high input costs really pushing through into much high export prices out of China. Maybe a quick follow-up question.
You have written extensively about the resilience of trade between emerging economies. In other words, EM to EM or global south trade. Considering these China export dynamics, what do you think are the growth inflation trajectories or imbalances that we need to be watchful of across EM for the balance of the year?
Yeah, I think definitely what's been striking to me is that the EM growth story has been surprisingly resilient for most emerging markets, despite all the shocks that we have seen. If you look at the latest data out of India for GDP growth from April to June, it was 7.8 percent, which beat all market expectations. And India was one of the countries which was most dependent on the Middle East for a lot of its gas and oil supplies.
So a lot of the economies have done slightly better than markets had feared because they have been able to increase supply of essential commodities through drawing down of reserves. At the same time, a lot of emerging markets are tied into the supply chain. So whether it's countries like Malaysia or China, which are now supplying a lot of the AI-related products, there's a good story developing there, which has helped support their growth outlook and actually seen growth being upgraded in some of these economies.
I think what's also interesting in terms of the narrative around the EM economies has been the fact that global liquidity is still quite flush. And as a result, a lot of these economies continue to get very strong inflows in their bond markets and equity markets. And that's the reason why EM sovereign spreads, for example, remain close to the tightest levels that we have seen since before the global financial crisis even.
But in terms of the question that you posed, with China providing a disinflationary trend, that is still being offset by concerns around the developing super El Nino, about the fact that the Middle East conflict continues to rumble on. So while you're drawing down your stocks right now, there is the risk that there might be some product shortages over the coming months, which could drive up inflation, commodity prices might remain high. And so I think that the growth inflation mix in a lot of emerging markets still could get a little bit worse over the coming months with inflation picking up.
And that's why, just like you were mentioning about what's happening with major central banks, where they're turning more hawkish, I think that even EM central banks will have to be quite cautious. They might not be hawkish immediately because they are also looking at the growth picture that's evolving. But for a lot of them, they'll be quite constrained in terms of being able to cut rates to support the economies.
They'll have to either keep rates on hold or hike because of the fact that inflationary pressures continue to persist. And that will have implications for their currencies and for their markets in general, including bond markets. Eric, a follow up question for you is that in our last podcast, you had said that there was a key risk of rising long term bond yields.
And that actually did materialize over the last month or so. Do you see an extended period of fiscal concerns or fiscal dominance now? The short answer is yes, unfortunately, for not only our audience, but for many of our clients.
I've been raving on about this theme of higher long term bond yields for probably about a year now. And what is interesting about the way it is playing out today is, I think, the confluence of factors that we as markets have really not been forced to contend with in quite a long time. Not only do we have this issue of elevated inflation, and some of that is because of the supply shocks and some of it's because of business capex, etc.
But we also have this widespread deterioration in fiscal balances. And it's gone in waves over the last five or six years. Obviously, the COVID crisis caused a deterioration in the fiscal narrative for very clear reasons and understandable reasons.
But then the follow up with the Russia-Ukraine crisis and then subsequent crises since then has put governments under enormous pressure to increase spending, increase subsidies for the purposes of supporting their economies. And again, maybe that's justifiable. The problem is that when we have periods of good economic growth, it doesn't appear as if there is any fiscal consolidation in the planning stages.
And I find that troubling. And so we've come to a point for both developed and emerging economies where we're seeing more spending, which requires more borrowing. And so governments across the board are increasing their debt issuance at a time when bond yields were already moving higher for a variety of other factors.
So interest expense for governments is really deteriorating. And I guess the other point that we really have to highlight is that when you think about the rates market at the front end of the curve, you really can assign a very good distribution of outcomes based on what you think the central bank will do, right? If you think the central bank does X, then one year or two year interest rates really should behave within a certain band.
So we call that a strong anchor. At the long end of the yield curve, 10 year and 30 year maturities, for example, it's inflation expectations, it's fiscal improvement or deterioration, and maybe some concerns around policy credibility. But when all of those are moving in the wrong direction, the bond market does not have an anchor.
So we can sit here and say, well, nominal growth in the US is 5%. So maybe 10 year treasury yields should be roughly around 5%. But the margin for error around that could be 100 basis points.
And I think that is what is going on right now in global bond markets. We've lost our anchor. Many central banks are moving in a hawkish direction.
Inflation doesn't appear to be coming down. And the fiscal story seems to be getting worse everywhere. And so I think what markets are doing is repricing after many years of artificially depressed yields.
And nobody knows where yields are meant to stop. And if you remember, that's why we flagged in our surprises report back in December of 2025 that we thought, for example, 30 year treasury yields could go to 6% or 30 year Japanese bond yields could go to 4.5% and 30 year JGBs were at 4.2 a couple of days ago. So we've seen real deterioration here.
And unfortunately, I don't expect it to stop anytime soon. And Eric, while the Fed seems to be taking a step back from guidance and intervention, the U.S. Treasury has stepped up bond market intervention.
How are you viewing this switch in roles of the Fed and the U.S. Treasury? And what does this mean for the U.S. dollar?
I think you describe it perfectly, Madhur. Kevin Warsh has come out very explicitly and said that he wants to reduce forward guidance, reduce the use of unconventional monetary policy, etc., etc. So a much less interventionist stance.
Treasury Secretary Besant, on two occasions now, appears to have stepped up intervention, not only FX intervention with regards to the Japanese yen, but also with the recent buyback announcement, his willingness to intervene in the treasury market. Now, my response to that, which I wrote about, was that the justification for that announcement was to help resolve some liquidity issues in the long end of the treasury market. And my view is that there aren't any liquidity issues.
The off-the-run bonds, which he referred to, are always less liquid than on-the-run bonds. And that's not any worse today than it has been in the past. To put it very bluntly, I think the reason or the justification for the buyback is really because they don't like the price.
And even though the amounts were small, my concern is that that shows a willingness to intervene more aggressively if they still don't like the price. And to your point, I think the dollar responded very poorly to that announcement of treasury intervention and I think poses a risk to the dollar in the short term. I think we have to highlight that if the Fed turns out to be more hawkish and to actually deliver rate hikes over the next six months, that's going to offset the treasury's actions.
But as you say, it raises a risk of policy instability, if you will. The monetary fiscal balance, I think, is going to be something that people will have to figure out again for the U.S. And with the midterm elections coming up, I think the assumption now in the marketplace is that we're going to see more policy uncertainty rather than less uncertainty.
And that's always a headwind for the currency. Medha, we've talked about risk a lot today, whether it's inflation, monetary fiscal policy, tariffs, et cetera. So let's shift the focus.
Let's look at the opportunities. Where do you see some bright spots in the global economy at the moment? I think we've touched on one of them, which is the AI-led investment story.
The U.S. and China are the key drivers of this story, but there are other parts of the world which are also participating. And you can see it in the investment numbers coming through, in the FDI numbers coming through. So it's not just an equity market story, which is also important, but there's an actual investment story developing around data centers, around trying to build ship production facilities, et cetera.
So that's actually quite positive. But I think for me, the key bright spot, despite all the shocks that we've talked about, is global trade, which has been fairly resilient. It hit a record high in 2025, which was partly a price story, but there's also a volume increase component there.
And even in the first half of this year, goods trade rose by about 12 and a half percent, which is at a very decent clip. And underlying all of this, of course, is the AI boom story. But also there are two structural drivers of trade that we have written about consistently over the last few years.
The first is the rise of South-South trade. China is at the heart of this trade. But now South-South trade or intra-emerging market trade now accounts for 20 percent of all global trade and is continuing to rise very fast.
And if you look at the fastest growing trade corridors of the world today, the emerging market countries are at the very top. China at the heart of this. But other countries like UAE, Turkey, Mexico, Vietnam, India, all of these countries are beginning to see a lot faster trade with bilateral trade partners.
And that's actually quite a promising story that's developing. And the other one is the growing importance of services trade. Services trade now accounts for about 27 percent of global trade.
In particular, digitally delivered services trade accounts for more than half of all services trade. And this is growing very rapidly. And we expect that this will continue to go quite rapidly over the coming months.
And that, again, should provide support to the global trade story. We're not suggesting that you might not see some slowdown coming through, given all the shocks that we have. But these structural drivers continue to suggest to us that although you got the trade and tariff pause, there are other areas which will help to offset some of the drag.
And Eric, maybe if I can put the question back to you, what are some of the opportunities that markets should pay more attention to than they are currently? I'd sort of add something to the theme which you discussed on tech and AI. But one of the things that we've noticed in the U.S. and in a handful of other economies is that corporate profits appear to be broadening out, which is another way of saying that it's not just tech where it's been overwhelmingly concentrated, but we're starting to see some better performance from non-tech areas of the economy as well.
You mentioned some of the aspects of the services economy, which I think is always underappreciated. I think there are a number of areas, whether it's health care, financial services, that seem to be picking up pace a little bit. And look, we know the challenges in the global economy today, both economic and geopolitical, and I'm not making less of them.
But if you combine a relatively good trade narrative and you add to that a little bit of breadth in some of the major economies, it does suggest that maybe what we've experienced over the last year is the very unfortunate downshift in global growth because of the conflict in the Middle East, but perhaps not the end of the business cycle. Perhaps this is a pause that refreshes. And we know that we're going to get very significant investment out of the Middle East, some of it rebuilding, some of it diversifying.
We know we're going to get very good investment in Europe, whether that's military spending or whether it's investment in other infrastructure remains to be seen. But there are a couple of possible tailwinds that that we could get in the global economy coming into the end of this year and into the first half of next year. So I don't think we can discount them.
I suppose my final comment on that is that when I look at financial market prices, my concern is that there's very little risk premia built into markets. You mentioned the very narrow level of credit spreads and sovereign spreads, which is obviously true, the low level of equity volatility. And my concern is that these positive narratives that you and I have both just described may already be in the price.
I'm not convinced of that. I'm just saying that's a concern that I have. And so if I think about market pricing, it feels like the market is more vulnerable today to a downshift in people's growth expectations rather than an upshift.
So, look, it's a lot to unwrap. It's extremely complicated at the moment, and it's only going to get more complicated with the U.S. midterm elections coming up in November, which will be a new risk for everybody to worry about. But lots for us to talk about in the next couple of podcasts.
Yes, thanks so much, Eric. I guess, as you said, some opportunities, but lots of challenges. Thank you all for listening in, and we look forward to you joining us for our next podcast.
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