Trump’s trade | Kamala’s trade: Should we start worrying about Trump’s trade vs Kamala’s trade? Arnab Das responds

Does one make? Fed rate cut Will it be inevitable in September or will there still be questions about it?
Arnab Das: There is a good chance that there will be a cut in September. Maybe, never say never, so it is not inevitable. But I think we have been moving in that direction for some time. Maybe the market has gotten ahead of itself as to the extent of the cut. flexibilization cycleHe had given a couple of advances, I would say, as to when the easing would begin, how deep the cuts would be, how fast and how big they would be.

But we now have more or less a correct estimate for the very near term. I think we are on the threshold of an easing cycle, perhaps not a very deep one, because I am of the view that we are going to have a bumpy landing, not a full-blown soft landing, but we are not going to have a hard landing and a severe recession either. So we can talk more about that. But I think the message that is going to come across in general is one of data dependence and yet of signaling the beginning of a rate-cutting cycle without strong commitments on the pace and extent of easing.

What’s wrong with him? fears of recessionDo you think they exaggerated when we were all talking about it just a couple of weeks ago?
Arnab Das: I think so. People have been calling for this recession to happen for years. We’ve been waiting for it when it comes to rate cuts. Part of the problem is that a lot of people are still trying to force a very unusual recession and recovery followed by disinflation into the normal cyclical pattern that we’ve all become accustomed to over a period of decades. But this has been a very different cycle. It’s had a lot more to do with the supply side than most cycles that people remember. And that’s still happening.

Much of the easing that has occurred in the labor market has to do with labor supply, with the labor force participation rate rising, with immigration rising, and with a widening gap between household surveys and establishment surveys, which send very different signals most of the time, but which this time are even more markedly different. So, without wanting to be too much in the camp that this time is different, there are important differences to watch and keep in mind as we wait for what is clearly a slowdown, but not yet clearly a recession, much less a hard landing, in my view.

It is not a recession or a hard landing, but what about India? It has managed to outperform the economy by far, whether in terms of growth or not. Stock markets have also been close to record levels. How does the global investor view India at this point?
Arnab Das: I think there is still a lot of optimism. Even though many people expect a stronger majority for Modi and the BJP in the elections, there is still a sense that this is a good time, not just this year, but also in the coming years and maybe in the coming decades for India for a number of reasons. The demographic dividend is still there, although it is not being fully exploited. The elections send the message that job creation and inequality need to be addressed. Unemployment and underemployment need to be addressed. So there are moves afoot in that direction. There is still a very strong possibility of India becoming more of a manufacturing economy. There is no reason why India cannot be. Before the British Raj, India was the largest manufacturing and trading nation in the world by far. So, you can go back in that direction, but you need to continue to liberalize, particularly liberalizing the labor market and the land market, and it may still be a bit difficult to do, but as everyone knows better than I do, steps are being taken in that direction at the federal level and at various state levels. India’s future looks brighter than it has been in a long time. The only problem for the international investor is how much is it reflected in the price, because stocks in India typically have very high valuations and now they continue to have extremely high valuations, so it is a challenge. But I think a lot of investors are still holding on to India. Institutional flows are still coming in and that is going to continue.

There is controversy over where this global shakeout we had last time actually started, namely Japan. And do you think the problems around the yen carry trade will continue and be both growth and economic? interest rate differentials Will this continue to be the case for the foreseeable future?
Arnab Das: We had a tantrum in the markets and I guess the tantrum has several different causes. One of them is that the US non-farm payrolls figure for July was unexpectedly weak and the market was apparently not prepared for that and somehow it coincided with a more hawkish than expected signal from the Bank of Japan Governor Ueda at about the same time a couple of days earlier. That triggered a volatility shock that somehow shook up a lot of carry trades.

If you look at the Chicago Mercantile Exchange data on net open positions, the foreign exchange positions in dollars and yen, they are down quite a bit. So, at this point, it seems like a lot of the speculative part of the carry trade has been unwound. Maybe what is left is some speculative positions. Some of those are picking up, as well as longer-term positions driven by more fundamental factors by Japanese retail investors, called Ms. Watanabe, institutional investors in Japan and companies, who are investing in higher-yielding countries because they are growing more, not just because of the higher yield, as opposed to the speculative investor, who is really betting on currency stability and an interest rate differential, which is what has been affected.

Now, looking ahead, the thing to do is to keep an eye on the situation because the interest rate differential is likely to continue to narrow. In my view, it will continue to narrow on both sides, with the BOJ gradually raising interest rates and the Fed gradually reducing them. Now, if either of those things change because Japan is reflating faster than expected or the US is slowing down faster than expected,

So, if I’m wrong and a harder landing is looming in the US, for example, that could trigger another bout of volatility. I think it will be more limited than the last one, because the last one seems to have wiped out a lot of the long-term speculative positions in dollars and short-term positions in yen, and not just in dollars, but also in Mexican pesos, Turkish liras and possibly even Indian rupees. Apparently, the Reserve Bank of India had to intervene or decided to intervene at that point.

So, a lot of that has been recovered, but some of it may be recovered again, especially since Governor Ueda also indicated that during the shock and turmoil, the Bank of Japan would not raise rates if market conditions were extremely volatile, which of course makes sense, but it creates a bit of moral hazard that encourages speculative short positions in yen and long positions in other higher-yielding currencies to come back into play. So, I would keep an eye on that, but I wouldn’t expect another episode as severe as we’ve had before.

What is the best tactical trade at the moment globally, given that the US dollar has fallen almost to the 100 level and crude oil has been very volatile around $75-80 and gold is still going up. The US markets are performing well. What do you think is the best tactical trade at the moment, in all of this?
Arnab Das: All of these things are going to continue to play out. I’m not sure I would make a very strong tactical bet in any of these directions right now because I think a lot of this is already priced in. So, I’m of the view that a 25 basis point cut is coming, that’s more than priced in. There’s something like 30, 32 or something like that, so the cut in September is, if most of us believe it’s coming, 25 basis points is right, that’s already priced in.

So it’s not going to do much. What we need to do is look further ahead and we’ll see that there will be a slower, more gradual and more data-dependent easing process. Still, it will lead to a weaker dollar. The rising gold price will continue to contribute to that because rates are coming down.

The dollar is weakening and some central banks, Russia, China in particular, maybe India as well, some frontline states in the war in Ukraine, given the situation in the Middle East, may be buying more gold by central banks and also retail and institutional demand is taking advantage of that, in addition to the weakening dollar and the rate cut cycle.

We also have to look further ahead and obviously think about the US election. Many of us in the market are discussing Operation Trump versus Operation Kamala. I think the longer-term Operation Trump could lead to lower growth, somewhat higher inflation than otherwise, and Operation Kamala could be a more reflationary operation, with higher growth and somewhat higher inflation. Either way, the Fed would be more likely to be constrained relative to what the market might expect if it were a purely demand-driven cycle with less of a push from potential fiscal changes or regulatory changes or structural changes driven by the US federal government.

So there’s a lot to take into account and I think it’s becoming more present simply because of the timing right before the election and the upcoming change of administration one way or another.