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Zawya
01-07-2025
- Business
- Zawya
Trump's push for regulatory reform highlights ‘Treasury put': Jen
(The opinions expressed here are those of the author, the CEO and co-CIO of Eurizon SLJ asset management.) LONDON - There has been much discussion of the so-called "Trump put" for equities, but perhaps more attention should be paid to the administration's effective "Treasury Put". Given the high U.S. public debt burden, the government must keep interest rates under control, and that appears to be the primary motivation for the Trump administration's recent push to relax a key bank regulatory requirement. U.S. Treasury Secretary Scott Bessent on May 27 discussed progress made to relax the Supplementary Leverage Ratio (SLR) requirement for U.S. banks. The SLR was introduced in early 2018 as part of the Basel III bank regulations to help ensure large banks held sufficient capital. The SLR is a second layer on top of the normal capital requirement, which is why it is considered "supplementary". What is special about the SLR is that banks' holdings of Treasuries incur a capital charge, in contrast to the normal capital requirement, which assigns government bonds a zero-weighting for risk purposes. Based on the current SLR, large banks in the U.S. are charged a 5% capital fee, while smaller banks are charged 3%. NECESSARY REFORM It is widely accepted that the SLR needs to be relaxed because it appears to be hurting large banks' ability and capacity to provide market liquidity, a particular concern given how much Treasury issuance has exploded since the pandemic. Outstanding U.S. Treasuries, including those held by the Federal Reserve, rose from 100% of GDP prior to 2020 to around 120% now, exacerbating the disconnect between supply and demand. Fed Chair Jay Powell has weighed in, commenting in February 2025, "The amount of Treasuries has grown much faster than the intermediation capacity has grown, and one obvious thing to do is to lower the bindingness of (the SLR)." The Trump administration is supporting efforts to do just that, with an agreement to relax the SLR expected this summer. COST CONTROL Even though SLR reform is intended to improve liquidity and thereby support bank lending and economic growth, one of the Trump administration's other key motivations is clearly keeping a lid on government borrowing costs. Treasury Secretary Bessent indicated as much in his May 27 interview, stating that relaxing the SLR could "bring yields down by tens of basis points." With the caveat that it is very difficult to estimate the yield impact of SLR reform econometrically, there's reason to believe that Secretary Bessent could be right. Reducing the SLR should, in theory, lower yields by boosting bank demand for Treasuries. Market estimates suggest that a one percentage point SLR reduction could lower the 10-year Treasury yield by 10-50 basis points, depending on the circumstances. Based on this estimate, dropping the SLR charge by two percentage points – a likely reform – could double that. Based on that assumption, we would expect to see a 0.50 percentage point reduction in the 10-year yield, which is consistent with Secretary Bessent's statement of "a few tenths of a percent". 'BOND PUT' The Trump administration is keeping a close eye on the bond market. Secretary Bessent has long been clear that getting the U.S. fiscal deficit under control is one of his top priorities, but this will be difficult to achieve if interest rates are too high relative to economic growth. The Secretary's repeated references to a relatively obscure issue like SLR relaxation and its potential impact on Treasury yields only highlights this focus. Importantly, this is not just a matter of watching out for bond market ructions, which any administration would do. It's about taking action to try to keep yields down. In other words, there is more likely to be a Trump "bond put" rather than a Trump "equity put". Or to put it another way, the strike price on the former is likely to be a lot higher. LOOKING FORWARD Given the Trump administration's focus on the bond market and recent trends in U.S. inflation and economic activity, it is reasonable to assume that the 10-year U.S. Treasury yield could trade below 4.00% in the fourth quarter, down from its current level around 4.30%. While yields remain elevated, likely because of perceived fiscal risks, a prospective relaxation of the SLR could have the opposite effect by boosting demand for U.S. government bonds. To be sure, other economic, geopolitical or market factors could complicate this scenario. But if we do see lower bond yields, this should support risk assets and be negative for the dollar, and, perhaps most importantly, it may buy more time for the U.S. to deal with its fiscal challenges. (The views expressed here are those of Stephen Jen, the CEO and co-CIO of Eurizon SLJ asset management). Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis of everything from swap rates to soybeans. Markets are moving faster than ever. ROI can help you keep up. Follow ROI on LinkedIn and X. (Writing by Stephen Jen; Editing by Anna Szymanski and Sam Holmes.)
Bloomberg
07-05-2025
- Business
- Bloomberg
Dollar Exodus to Unleash $2.5 Trillion FX ‘Avalanche,' Jen Says
The dollar may face a $2.5 trillion 'avalanche' of selling as Asian countries unwind their stockpile of the world's reserve currency, according to Stephen Jen. Asian exporters and investors may have amassed an 'extremely large' pile of dollars through the years, widening the region's trade surplus with the US, Eurizon SLJ Capital's Jen and Joana Freire wrote in a note on Wednesday. As a US-led trade war deepens, some Asian investors might repatriate chunks of funds or ramp up levels of protection against a weakening dollar — potentially triggering an exodus from the world's reserve currency.
Zawya
11-04-2025
- Business
- Zawya
Tariffs or no tariffs, the dollar correction is finally here: Jen
(The views expressed here are those of the author, the CEO and co-CIO of Eurizon SLJ asset management.) The dollar appears set to embark on a multi-year correction against a wide range of currencies, even in the absence of a trade war, as the dollar's lofty Wall Street valuation runs up against Main Street reality. After the announcement of broad-based tariffs on President Donald Trump's "Liberation Day" on April 2, global equity markets experienced a violent correction, and the dollar initially weakened – undermining the consensus idea that tariffs equal a strong dollar. This episode has raised the question of whether the 'Dollar Smile' has stopped working, as this rule of thumb would suggest that a risk-off scenario should lead to a strong dollar. But I don't think the dollar smile is obsolete. I think what's happening is that the dollar's lofty clearing price in asset markets is finally converging with its real value in the goods market. OVERVALUATION Trade globalisation has enriched the rest of the world over the past quarter of a century, but a multi-polar real world has not been accompanied by a multi-polar financial world: the dollar and dollar assets have continued to dominate. This unipolar financial world means that there has been huge foreign demand for USD assets, disproportionate to the relative size of the U.S. economy. This has arguably led to an over-valuation of the dollar, ever-larger external deficits for the U.S. and an uncompetitive manufacturing sector, as the cost of manufacturing labour has priced the U.S. out of global markets. The dollar index was around 19% too expensive at the end of 2024, according to our valuation framework, using the median valuation across 34 currencies. This is the third episode of a dollar overshoot in the last 40 years, following those in the mid-1980s and around 2000. While the size of the current dollar overshoot is slightly less extreme than that witnessed in 1985, on the eve of the Plaza Accord – a joint agreement to weaken the dollar – the current episode is the longest. By our calculation, the dollar has been over-valued for 10 years, almost double the length of the prior two episodes. EXCEPTIONAL MIRAGE Much of the dollar appreciation in recent years was justified with the 'American Exceptionalism' narrative, the idea that corporate America was simply more productive, more profitable and more dynamic than the rest of the world. But that story appears to have been part genuine and part a mirage. The U.S. economy has enjoyed a premium in productivity growth over other major economies in recent years, with an average annual labour productivity growth rate in the past decade of about 1.4%, compared to 0.5% in Europe. However, these productivity measures may be misleading. For one, the tech sector has almost certainly boosted them. There is little evidence that the U.S.'s traditional manufacturing and services sectors like healthcare or education are more productive than their respective sectors overseas. More importantly, the outsized – and unsustainable – fiscal stimulus of some 6.5-7.0% of GDP in recent years has flattered many of the macroeconomic measures that have helped substantiate the 'American Exceptionalism' notion. CAPITAL REPATRIATION The dollar's elevated valuation is also vulnerable because it is highly exposed to the risk of a 'sudden stop' in foreign capital inflows, given the U.S.'s huge net foreign liability position. In 1980, the U.S. net liability position was worth about 10% of GDP. It has now surged to 85% of GDP. The trade war is far from over, and the more protracted it becomes, the more the Fed will be under pressure to provide monetary stimulus, while much of the rest of the world will be under pressure to provide fiscal stimulus. The resulting weaker dollar could, in turn, fuel prospective repatriation of short-term capital back to surplus jurisdictions like Europe or China. Several European countries, including Britain, Ireland, Germany, and France, hold substantial short-term capital that could potentially be repatriated easily. In aggregate, these four European countries hold more than $8 trillion of U.S. equities and bonds. SHADOW PRICES There are at least two shadow prices for any currency exchange rate: one reflects the capital markets, and the other reflects the real economic fundamentals. In most countries and most of the time, these shadow prices track each other. But in the U.S., the former has been materially higher than the latter for years, creating an unsustainable and vulnerable setting for the lofty dollar. And the dollar's overvaluation has been one factor contributing to the U.S.'s loss of manufacturing competitiveness. Trump's tariffs are a reaction to this unpleasant reality. Given the administration's stated goals of reshoring manufacturing and reducing the country's twin deficits, it makes little sense to us to expect the dollar to appreciate in response to the trade war, no matter where tariffs end up. If anything, it is more likely that the administration will be focused on guiding the dollar lower to give U.S. manufacturers a chance to compete in fiercely competitive global markets. (The views expressed here are those of Stephen Jen, the CEO and co-CIO of Eurizon SLJ asset management.) (Writing by Stephen Jen; Editing by Anna Szymanski and Stephen Coates)
Reuters
24-03-2025
- Business
- Reuters
Don't count out a Trump trade détente: Stephen Jen
March 24 - (The views expressed here are those of the author, the CEO and co-CIO of Eurizon SLJ asset management.) Many investors went into 2025 assuming Donald Trump would use tariffs as a negotiating tool, but this belief has been shaken in recent weeks, generating significant market angst. But Trump's fiscal strategy may yet lead to a benign outcome for the global economy. Get a look at the day ahead in U.S. and global markets with the Morning Bid U.S. newsletter. Sign up here. The Trump administration is clearly intent on targeting the U.S.'s twin deficits. The White House is seeking to address the fiscal deficit – which has risen to around 6% of GDP – by slashing government payrolls via the Department of Government Efficiency (DOGE). And it's currently trying to reduce the trade deficit through tariffs. While DOGE's actions may initially be contractionary – potentially leading to a temporary 0.3% rise in the unemployment rate, according to my calculations – the pain should be short-lived. If the Trump administration is correct that U.S. government spending is rife with inefficiencies, fraud and abuse, then an operation like DOGE, if properly executed, ought to boost productivity over the long term, which markets should welcome. Tariffs are a different story. Concerns about a broadening, deepening trade war have helped push down the S&P 500 by around 10% from its peak. U.S. financial markets are struggling to digest the open-ended trajectory of today's escalating tariff threats, and for good reason. As a reminder, tariffs implemented through the Smoot-Hawley Tariff Act of 1930 exacerbated the Great Depression. High import tariffs might not lead to a crisis of that magnitude this time around, but they could cause a mild adverse supply-chain shock. And remember what Covid-19 did to the global supply chain, and in turn, what supply-chain disruptions did to inflation and financial markets? I count myself among those who thought tariffs would simply be a negotiating tool for Trump, not a desirable end in themselves – particularly not to raise revenue. Imports are only 11% of U.S. GDP, so tariff revenue is unlikely to ever fully substitute for income taxes or other duties. But even if the Trump administration is more willing to implement higher tariffs than previously thought, that doesn't mean long-term tariff hikes are inevitable. There's still a path that could lead to lower tariffs and, ultimately, a fairly healthy global outlook for the rest of the year. KEEP NEGOTIATING When assessing the potential danger of the tariff threats, it's helpful to look at what Trump is actually doing. If the administration were seeking to push through tariffs for their own sake, why would Trump be planning to meet Chinese President Xi Jinping in April and why has the U.S. been negotiating with Canada, Mexico and the European Union? And why should we dismiss the possibility that U.S. trading partners will be willing to reduce their tariffs on U.S. goods? Might they not be more inclined to do so now that Trump has shown he's serious? And if they do, the U.S. could respond by scrapping further hikes or even reducing some of its tariffs. In any case, President Trump's strategy appears to be front-loading risk and back-loading possible rewards. The "Sharpe ratio," or risk-adjusted return, of his trade policy, thus, should be very low at first, as the denominator explodes, before rising sharply later, as the denominator shrinks and the numerator rises. 'Risk now, reward later' is a sequential feature that could very well be by design. 'MAR-A-LAGO ACCORD' Another way out of the escalating tariff war is for the U.S. to pivot and focus instead on some type of "Mar-a-Lago Accord" – an organized plan among multiple countries to drive down the dollar, akin to the Plaza Accord of 1985. The dollar has been overvalued for nearly a decade, and the size of the overvaluation is significant across a wide range of currencies. This has contributed to the erosion of U.S. manufacturing competitiveness and stoked support for protectionist measures in the U.S. Consider that the average hourly manufacturing wage is $53 in the U.S., compared to $32 in Germany and $10 in China. Of course, the dollar has already weakened 6% this year, potentially because markets are pricing in a benign soft landing – or moderate economic slowdown – in the U.S. But if the Trump administration were to abandon tariffs in exchange for a plan to systematically weaken the dollar, markets would likely welcome this more organized approach, meaning U.S. equities could reverse course even if the dollar continues to slide. Some may currently be underestimating the willingness of U.S. trading partners to agree to a Mar-a-Lago Accord. SOFT LANDING What does all this mean for the economic outlook? Backward-looking data points to a global economy that could achieve 3.2-3.3% growth in 2025, similar to 2024 and 2023, though some of the Trump administration's forward-looking policies pose serious risks. What current data indicate is that 2025 might see the U.S. experience a soft landing, while Europe and China accelerate, propelled by fiscal consolidation in Washington and fiscal expansion in Berlin and Beijing. This prospective economic convergence may help explain why, despite the significant correction in U.S. equities since late February, emerging market currencies have so far exhibited few signs of angst and U.S. Treasuries have failed to rally by an amount commensurate with the acute decline in U.S. equities. In short, a benign global outcome still remains my base case, though further escalations in trade tensions could lead to a more sinister scenario. Much will depend on whether Trump's tariff threats prove to be a beneficial tool or a self-defeating end in themselves. (The views expressed here are those of Stephen Jen, the CEO and co-CIO of Eurizon SLJ asset management. All chart data is from Datastream.) Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
