Weekly Monologue
This week ended up being more about geopolitics than economics.
We are finally able to welcome a fragile peace in Gaza after two years of conflict.
Less important from a human welfare perspective (at least in the short run), but certainly more economically significant, were President Trump's Friday social media posts that have reignited the most sensitive front on the global trade war.
To summarize briefly, tension over China trade policy has been simmering into the fall as U.S. soybean farmers are feeling the pain of China's decision to avoid the U.S. market entirely. Recently, China has raised port fees for U.S. ships and imposed heavy curbs on rare earth exports. On Friday, Trump published an angry missive threatening to apply a 100% tariff on Chinese goods and end software exports on November 1, and also threatened to withdraw from negotiations with Chinese leaders later in November (Beijing's response was to urge dialogue).
The immediate upshot, as you will see in the next section, was a complete tailspin in markets, with consumer-focused sectors getting pummeled and a clear risk-off move taking hold everywhere except the gold market, which appears to have developed its own new internal logic.
Taking a longer-term perspective on this latest move, three things are evident:
- Tariffs will remain both a domestic-focused economic policy and an international bargaining chip for as long as this administration lasts.
- Global economic uncertainty should be considered very high; this will dampen investment spending outside of AI-linked outlays.
- Upside inflation risks are significant.
Altogether, and despite the best efforts of the Fed and investors, this type of disruption is keeping activity growth below potential and inflation above target, contributing to the continuous sensation that the U.S. economy is on the verge of either breaking into an all-out boom or falling into a crisis. This is why the "sluggish" Regime that has defined the past two years remains our central scenario on a 2-year ahead basis.
See the Macro Monitor section for our latest Factor and Regime updates.
The U.S. rout on Friday will overshadow what would have been the stories of the week: new highs in Japanese equities and gold. We go deeper on the drivers of both in our two Memos.
Market Monitor
Trump's latest China tariff attack sent markets into a complete tailspin on Friday. The S&P 500 was down -2.4% on the week, with tariff-exposed consumer-focused sectors the hardest hit. An increase in risk and uncertainty was evident in a classic flight to safety, with falling yields on T-Notes (the U.S. 10-year down to 4.05%), higher corporate and leveraged loan spreads, and a stronger dollar.
Oddly, the gold price fell on Thursday and Friday after hitting a new all-time high of USD 4040 per ounce on Wednesday. Further evidence that the normal rules don't apply to this gold market.
This type of market action has usually been enough to trigger a quick policy rethink in the Trump Oval Office, or at least give key advisors the ammo to talk him off the ledge (just don't say the word "TACO"). We wouldn't be surprised if there is a thaw in U.S./China discourse over the weekend.
Macro Monitor
The key U.S. and global data and events this past week:
- FOMC minutes: We've criticized the Fed for appearing to ignore the upside inflation risk in their September meeting and subsequent speeches, but the minutes showed some FOMC members raised serious concerns over price levels.
- Canada Labour Force Survey: Canada's unemployment rate managed to hold at 7.1% (against a consensus expectation of 7.2%) on strong employment increases in manufacturing, healthcare and social assistance, but not enough to reverse the broad softening trend.
- UMich Survey of Consumers: Even though 1-year Inflation expectations softened very slightly (down -0.1pp to +4.6%), consumers still expect an acceleration in prices, and sustained above-target inflation (+3.6% on a five-year-ahead basis).
Fed outlook getting interesting as economy deteriorates in September
The minutes of the FOMC's September meeting confirmed one thing we knew already: that the committee would be comfortable with further easing this year on top of the 25bp cut they decided on in the meeting ("Most judged that it likely would be appropriate to ease policy further over the remainder of this year"). Markets have locked expectations of 25 basis points in the October and December meetings, which would see us entering 2026 with the Fed Funds Target Rate down to 3.50-3.75%.
Yet "a majority of participants emphasized upside risks to their outlooks for inflation." That's important. At the very least, it will this will put a floor on how far the Fed can cut (a further 25 basis points in January is a toss-up). But we can very easily see a situation in which the labor market doesn't weaken much further – largely because labor supply is being restricted as demand weakens – while inflation rises as tariffs bleed further into consumer prices. To our mind, markets have too much confidence in 50 basis points of easing.
Indeed, our updated September Price Factor has now not only moved above the post-2008 average, but also above the full sample average, which includes the stagflation episodes of the 1970s and 1980s.
The updated Factor series also shows growth tanking. It's not impossible that things have stalled, but take this with a pinch of salt; we have very little activity or labor market data in September thanks to the shutdown. Relatively easy financial conditions and strong Sentiment suggest that consumption and investment have probably held up well in Q3.
arcMacro Factor and Regime Update
What we'll be watching next week
- Delayed official U.S. Data: The BLS is reported to have recalled some furloughed workers back into the office to work on the September inflation report. It doesn't look like they'll meet the initial October 15 deadline, but we'll likely see it before the end-of-month FOMC meeting.
- US Activity Data: The Fed and private sources will publish a range of indicators relating to regional and national September activity, which will improve our confidence in the September arcMacro Activity Factor estimate.
- IMF/WB Annual Meetings: The global economics community will descend on Washington, D.C. for their annual shindig — updated growth and inflation forecasts will dominate the news, but we'll be focused on the Financial Stability Report (Oct 14) and any updated research and commentary on private markets risks and regulation.
Memo: A gold play for private funds
It’s hard to shake the feeling that gold has made the jump this week from a structural rally to a hype-driven surge.
Are private funds missing the bus?
Traditionally, PE and VC have shunned old-school commodities. Since 2020, they’ve invested just $3.7 billion in the gold industry globally, and 70% of that via private investments in public markets (PIPEs) by specialist funds and individuals. That compares to $13.4 billion funnelled into stablecoins and crypto asset startups.
The private markets industry has exposure to the “dollar diversification” theme, just not via gold.
Given the historical volatility in precious metals, who can blame them? On a five-plus-year timeline, a yield-free asset is generally a bad bet when you’re benchmarked to public equities.
Those who bought the 1980 gold spike were down -65% in real terms five years later.
This time might be different because the gold rally still has legs, and there is a high floor on the price even if it corrects.
Global central banks, sovereign wealth funds, and asset managers holding a little less USD and a little more gold means, on aggregate, a massive rise in demand for the yellow metal. And if you agree with me that we’re likely approaching a period of somewhat lower interest rates and meaningfully above-target inflation, gold is an excellent hedge.
The upshot: forward margins for gold miners are looking very healthy. Gold handling and storage will become more profitable, too. Companies offering new ways to give retail and institutional investors gold exposure are in a strong growth market.
All of these businesses will be looking for capital to invest in their growth. Enter private equity.
Memo: How to defuse a demographic time bomb
The surprise election of Sanae Takaichi as leader of Japan’s Liberal Democratic Party triggered another leg up in Japanese stocks this week.
I’m structurally bullish on Japan’s prospects over the next decade. Announcing that conviction usually gives rise to the following push back: “The population is shrinking, it’s a demographic time bomb.”
Here’s why I’m not too worried:
- The labor force is still growing because of higher participation among women and older male workers.
- On top of that, Japan is opening itself to inward immigration to grow the labor force and plug skills gaps.
- Hourly productivity is growing—in stark contrast to other G7 economies.
- Structural reforms and a return to positive interest rates and inflation are unlocking domestic capital and generating a wealth effect that’s driving improved consumption growth.
Japan is updating its social contract and economic structure to adapt to demographic realities. It won’t always be smooth, but more than a decade on from the start of Abenomics, the dividends are starting to accrue.
Advanced Western nations facing similar aging curves would do well to take notes.