The heightened anticipation after looking at the US CPI is that there is going to be a rate cut finally from the Fed this September. What are you building up?
Taimur Baig: I think that there are still things to worry about with respect to the inflation dynamic. When we look at what is happening with prices that are tariff relevant, they are going up. They can be considered as one-offs and the Fed could say that we are going to look past it and go ahead and think about other things than inflation, namely the weakness in the labour market which is palpable.
So based on that, we have always been in the camp that the room for two 25 basis points rate cuts in late third quarter and early fourth quarter were available and we are heading in that direction. But mind you, this issue of headline inflation getting some upward push from tariffs is not going to go away. We could be sitting in the first quarter of 2026 and second quarter of 2026 seeing the lingering impact of these tariffs on headline inflation numbers as well as probably on the core inflation numbers. That would make the Fed’s job tough in 2026 just when Powell is stepping down, just when Trump is becoming even more desperate about rate cuts, it is going to become very complex for the Fed regardless of who is there, no matter how much of a loyalist he is to Trump. From a headline perspective, inflation going well past 3% in the first half of 2026 would be problematic but that is an issue for another day. Today, for the next three-four months, there is some runway for the Fed to cut rates.
Some comments were made by Donald Trump that the tariff situation has not impacted inflation. Do you believe it is too soon to be talking about this and we should be waiting a little bit longer before the tariffs start impacting or do you think he is right when he says that there is absolutely no impact of tariffs on the CPI?
Taimur Baig: We have enough data right now to get a good sense of how this is playing out. There is a three-prong strategy as far as a company is concerned facing higher tariffs. Strategy number one is to go to the suppliers and say can you take a discount at least for a while, we have a long-standing relationship, please take a discount because I cannot deal with passing all these tariffs through, I will get in trouble with Trump, I will lose market share and so on. Some of the suppliers, particularly in China but elsewhere as well, are agreeing to that discount for the time being.
Second, if you take it on your balance sheet and we have seen this guidance coming from a whole bunch of US corporations who are saying that they are paying a lot of tariffs and that is hurting their bottom line to some extent.
Third is passing it through. It will all end up in the third eventually, but right now, we are seeing more of the first and the second, squeezing the suppliers to some extent, and taking on some of the hit on the balance sheet and ultimately it will all get passed on to the consumers. It will be a protracted process. It will not be the greatest outcome for the US economy per se. It will erode competitiveness. It will also manifest in a one-off increase in the price level. But it will happen in a protracted manner. It is not something that one can declare victory or loss right now. We will have to see play out over the next 6 to 12 months.
But I guess a lot would depend on whether the Fed moves on softening because I bet a lot of money is also sitting on the sidelines waiting for it to be deployed back into the US, should there be a cut?
Taimur Baig: In terms of US treasury market outlook, the outlook is not as contingent on a likely rate cut as one would think. That is a much bigger function with respect to US fiscal position, and with respect to the overall debt management of US treasury, and the various policy noises we are hearing about whether the US wants to be more confrontational with the rest of the world in terms of holding US treasuries, whether it is recently passed legislation the Genius Act, and what it means for treasury demand. All those things play a big role in determining global investors’ appetite for US treasuries.
If we keep all of those things aside and just think about the short term rate cuts to some extent reflecting political pressure from Trump, to some extent being oblivious of the inflation situation that might get complicated down the road, then the curves will probably steepen and not necessarily flatten in response to a rate cut. So, the data flow with respect to the jobs market, with respect to activity are important and those things are showing some degree of weakness that might lead to the market expecting a series of rate cuts. They may be disappointed with that. We may get a couple and after that, life might get very complicated.
But with respect to the US market, the record run continues. How much of it is on the back of the fundamentals and how much on the back of sentiments? Along with that, the Asian markets too are holding up for now and select markets like Japan are seeing a good rebound. What is making this rally continue? What is your take on that?
Taimur Baig: Let us divide the story in two parts. One is the US and one is the rest of the world. In my view, there are two different stories. In the US, there is clearly the AI and Gen AI related spending spree. Nothing like this has been seen in history. The kind of money the large tech companies are spending is creating a huge amount of demand for talent, for goods, for services in the tech sector and that is absolutely spectacular and it is a very lopsided stock market boom.
You take the top seven-eight companies aside, the rest are doing pretty ordinary and that is where the connection between the rest of the market and the weakness in the jobs front and weakness in the activity front come in. But for the top seven-eight companies, it is a golden age. Investors cannot give them enough money. They cannot reward them with any higher valuation than what is justified. Sentiment is extremely strong.
For the rest of the world, we are seeing some degree of home bias displayed by investors, not at the expense of the US. People are not divesting from the US. It is not a de-dollarisation story, but it is a story where European investors, Japanese investors, Chinese investors, Southeast Asian investors are finding it in their own interest to have more capital in their own markets. The cross-currency basis has moved in that direction. The yields are not bad at the long end of the spectrum.
Stock market valuations are very attractive compared to the US. All of those things are bringing both domestic investors back to their markets to some extent and US money managers, I am seeing a significant amount of interest in non-US jurisdictions as well. It is not a de-dollarisation story but a story of where the wider spectrum of the market is becoming more appealing.