FidelityConnects: Jurrien Timmer – The global macro view - July 28, 2025

[00:01:52] Pamela Ritchie: Hello, and welcome to Fidelity Connects. I'm Pamela Ritchie. With trade deal announcements in full swing global business leaders are pouring over whatever details can be found to show the emerging architecture of America's new trade connections. This week looks to major central banks as well in Canada and the U.S. for decisions about whether to cut or hold interest rates, and for commentary from the BoC and the Fed on how to thread the needle between overly restrictive and fighting future inflation. For the economies of these two neighbours it is a tale of two very different cities. We will hear in the commentary how that stacks up. Joining us today to help set some of these moving parts into an investment thesis while explaining the more evident fiscal dominance in markets  is becoming is Fidelity Director of Global Macro, Jurrien Timmer. Welcome Jurrien, great to see you.

[00:02:45] Jurrien Timmer: Good morning, Pamela.

[00:02:46] Pamela Ritchie: Delighted to have some time with you here today. Let's begin with the trade deals, if that's all right. We'll invite everyone to send their questions in, I'm feeling there could be a few on this. The EU has signed this deal. There's immediate pushback from business leaders saying, oh, my goodness, you negotiated our rights away. That said, they've come a long way. Where does this land?

[00:03:05] Jurrien Timmer: I think the market's overall senses a little bit of relief that. If we dial the clock back to early April and Liberation Day and all these crazy tariff amounts, these reciprocal tariff amounts that the president was holding on this board, it looked like it was a grammar school math experiment in in terms of where those numbers came from, to then giving a pause and sort of a calming down period where negotiations could take place. Now with negotiations taking place and the numbers, obviously, they're tariffs, they're an import tax, someone has to pay for it and I think it's generally the importing company and also the consumer so it is not a good thing in terms of someone has to  for these things. I think there's generally a relief that maybe that whole wave of all those announcements and punitive actions, that that wave is cresting. There's a Japan deal, now there's going to be an EU deal, I'm sure there'll be a Canada deal, and that at least we're kind of ticking the boxes. Obviously, no one's going to like all the terms for all the events but when you have that cresting wave while a new wave is sort of forming in terms of the big, beautiful bill it lifts earnings.

[00:04:34] The tariffs, I think, are generally not perceived to be bad enough to really kill the earnings engine, at least in the U.S., and now we get another wave that should boost earnings as well as capital spending from the big, beautiful bill. As a result, we're seeing earnings season now for the second quarter coming in very, very strong. It's still early days, of course, in terms of where the tariff cookie will crumble but I think that's generally what is supporting the markets. On top of that, you've got a fairly ample liquidity environment in terms of global money supply. Animal spirits are returning, people are buying the meme stocks again. That was so 2021. I think, generally, the market is optimistic that you'll get another big fiscal impulse coming within the U.S., and, of course, you're seeing this repeated elsewhere including Canada and Germany and other parts of the world, while the worst case scenario of a trade war leading to a capital war has sort of been moved to the side. I think that's generally what the vibe is like in the markets here

[00:05:50] Pamela Ritchie: Interesting. I don't want to jump too far ahead because there's lots of pieces in between but if you look on some of the trade calming, to an extent, I'm glad to hear you think Canada will have a deal too, that's very nice here, in any case, are we looking at a growth market, I guess, is sort of the question, and is it aimed to kind of grow out of debt, which has been front and centre. Of course, we just got Bessent and the entire administration, to try and grow your way out.

[00:06:21] Jurrien Timmer: I think there's generally a recognition in Washington amongst policymakers, but also in the markets now, that really nothing stops the train in terms of deficit spending. This is a worldwide problem, of course. You have ageing populations, lots of entitlement programs around the world, pensions that have to be paid, and you don't have enough, generally enough, organic growth through rising birth rates and things like that to just be able to maintain that status quo. The alternatives are, obviously, default will be one but nobody's going to do that. Austerity would be one. That's what Greece did during the sovereign debt crisis, and that's what Argentina, of course, has done. That's generally a very unpopular action and it, obviously, curtails growth in a pretty big way and it's, generally, politically suicide. Really, I think, what the policymakers in Washington led by Scott Bessent are hanging their hat on is that, okay, we're not going to be able to cut the deficit so we've got to outgrow it. I think the big, beautiful bill is part of that, and we'll talk about this in a bit, but keeping monetary policy accommodative enough to help pay those bills is another part. I think that's what they're kind of focused in. They're all in, they're not going to be able to cut the debt or cut the deficit so let's grow our way out of it.

[00:07:57] Generally speaking, it could happen. It's hard to do, to have lots of growth like we did for instance after World War II because we had a whole baby boom of new people to come into the economy and increase GDP. Right now we have an immigration policy that's, obviously, not the friendliest so it's not going to come from a growing population, especially with the ageing population that's already in place. There's a hope that the AI boom is going to create that productivity lift that, in turn, will increase the speed limit, if you will, for the economy. Again, the math, the very simple back of the envelope math, as long as GDP growth, nominal GDP growth is higher than the 10-year yield, the cost of borrowing, basically, the debt is considered sustainable. Right now that's been the case, and it has been the for some time. The 10-year is at 4 1/2-ish, the 5-year growth rate in nominal GDP, or nominal potential GDP, is around 5, 5 1/2. It's sustainable right now but if the bond vigilantes ever were to cry foul and say, you know what, we're going to push yields up to 5 or 6% and that growth rate would happen to falter to 4% then, of course, it's a problem.

[00:09:24] That can be mitigated in one of two ways, or two ways. One is if you get that productivity boom from AI you can lift that non-inflationary speed limit. Two, if you somehow find a way to keep the 10-year yield or funding rates down that's another way of doing it, and that gets you into the whole financial repression conversation that we've, of course, talked about extensively during COVID and other times. There's only a couple of levers there and maybe only one has to be pulled, maybe both have to be pulled but that's kind of where this train is going. I think that now that the tariff question is kind of getting some answers, even if the answers don't please everyone, I think that's really going to be the next big story in the markets in the coming year plus, especially with Jay Powell at the Fed retiring, at least from the chairmanship role, next year.

[00:10:26] Pamela Ritchie: This week there is a Fed decision and there's been great pressure, we know, about the entire story on Jay Powell to cut rates. Should we begin with what's happening in two days and then sort of extend to the story of what that might look like, a post-Powell Fed, eventually, at some point? Any chance he's going to cut rates this week? He said no, basically.

[00:10:50] Jurrien Timmer: It's not expected and, again, there is still the sense, even though it's not completely visible yet where the inflation is coming from, I mean, even the Bureau of Labour Statistics, I think those are the ones measuring inflation, they're not even really staffed enough after the DOGE cuts to even have a sense of where prices are at, but that's a whole other conversation. Basically, when you look at the Taylor Rule, which is a rules-based algorithm of where the Fed should be, it's a neutral rate plus an inflation component plus a growth component, it suggests that the Fed should exactly be where it is. It should be a hair above neutral, and neutral is probably 3 1/2 to 4, Fed's at 4 3/8. The unemployment rate at 4.1 is below kind of what's considered the sustainable full employment rate which we used to call NAIRU, that's about 4.3. The inflation rate at about 2.7 has been very sticky there and that's above the Fed's target at 2. Under no circumstances, as far as I can tell, would the Fed be justified to cut rates into the accommodative zone, which would be, let's say, below 3 1/2. You would have to be in a recession, and we're far from that. That's certainly not justified.

[00:12:19] The Fed is justified to cut once, maybe twice, and maybe it'll do that in order to appease the couple of people on the Fed who are very blatantly lobbying for the role of the next chair. I won't mention any names but there is a risk that if the Fed holds policy steady this week, which is the expectation, that you could get some dissentions. That's not the first time that's ever happened, it's not that big a deal but, again, there's a couple of people on the Fed who want the next job and who are making it, in very Trump-like fashion, making it very obvious with their speeches that they are willing to go along with sort of the game plan in Washington. Maybe the circus starts this week. It's only going to get worse because Powell's term ends next year, May, I believe. He may or may not stay on at the Fed as governor. His overall term doesn't end until 2028 but his chairmanship term ends in '26. Then you get into the whole notion of, okay, will a de facto successor be named, whether it's Waller or one of the other folks. Is that person from within the Fed, from outside the Fed? If it's from outside of the Fed there has to be a vacancy at the Fed to do that so Trump might be limited in where he can kind of fish from but let's say someone within the Fed. Then you're going to have issues where that person starts making proclamations of what he or she would do after Powell leaves. That can get kind of chaotic because then it's like you don't really know who to believe anymore.

[00:14:10] It weaves into the larger picture of what we call fiscal dominance where, clearly, the administration is moving along with fiscal expansion in order to pump up this engine, this economic engine, to grow out of debt. I mean, they are very conscious about the debt. They want to reduce the debt, at least relative to GDP which is how we generally look at it. I think in that sense they have the right idea in terms of you don't want to get stuck in a debt spiral, nobody likes that, so you have to grow your way out, maybe AI is the ticket. But if it's not you'll have to keep rates low enough that you can actually fuel this debt while growing out of it. It gets you into the '40s, into the Japan financial repression era that is sort of not quite ending but sort of ending, or even the late '60s. Then you get into a much bigger can of worms, or kettle of fish, in terms of if that happens what is the price that we have to pay for that? Is it higher inflation? If rates are artificially low is it a weaker currency? Again, we have some charts here so we can go into that. For me, this is the next chapter or iteration of big picture stuff that we need to think about.

[00:15:36] Pamela Ritchie: Let's ask you to bring some of those charts up. One piece of this, and I wonder if you could do a little bit of a primer on us, in fact, if rates fall and therefore there's some stimulus, essentially, released into the economy, the long term yields, the duration yield story will probably fire straight up and then they introduce yield curve control which often doesn't sound like what you'd hear about in the United States. You hear about that in other countries. Remind us of what it means and what would have to happen to bring that in.

[00:16:11] Jurrien Timmer: Let's go to slide 4, slide 9, sorry. Let's unpack this a little bit. Obviously, this is the fact that it's staring us in the face, and this is not just in the U.S. This is the U.S. in this chart but this is happening everywhere in the world, or at least in developed nations, Canada, UK, continental Europe, Japan, China. This is a unique story to the U.S. It's a story about global population stagnation, if you will, at least in the developed world. The increase in debt since COVID is 13 trillion. In the early years the Fed was sort of mopping that up during, again, the QE days during COVID and following COVID, and then it overstayed its welcome. It was too accommodative in '21. We got, basically, a little asset bubble. We got, obviously, the inflation, the COVID inflation. Then the Fed reined in, raised rates dramatically, as did other central banks, and then started to shrink its balance sheet. From that point on the debt kept going up, and it's really going to go up now because we have the second $5 trillion fiscal impulse now in five years, but the Fed's holdings are going down. That means there are really no longer any uneconomic buyers, and by that I mean buyers who are price insensitive, because central banks are, basically, not in the QE business anymore. The question is, who's going to buy this debt at what rate?

[00:17:46] Pamela Ritchie: The Treasuries, like who's going to buy Treasuries?

[00:17:51] Jurrien Timmer: Yes. If we then go to slide 11, that brings us to the Fed, of course, and we know the drama of Trump calling Powell names. It's very unfortunate to hear all that because I think Powell generally has done a good job and he's an upstanding citizen that is trying to manage the Fed in an independent way, which is exactly what it should be doing. The Fed has cut 100 basis points last year. It can certainly cut a couple more times until it gets to neutral. There is some room. The economy, clearly, is not clamouring for it and that's why I think he is, rightfully, holding on to that dry powder but he could cut a few times and then be closer to neutral. That's probably not going to stop the president from abusing him. The question then is, and if we go to slide 12, if the Fed were to cut more than is deemed justified on the basis of the Taylor Rule, of its dual mandate of price stability and full employment, I don't think Powell would do that but his successor might.

[00:19:06] Let's say you have a blatant political hack in the Fed and he cuts rates to 3% when there's absolutely no justification to do it, well, there's no free lunch, right? So at that point the yield curve, presumably, would bear steepen, meaning the shape of the curve goes up because long rates are rising while short rates are falling. Then the term premium would rise. It's already at about 80 basis points, it could go to 150. Then all of a sudden you've got short rates at 3 and long rates at, whatever, 5 1/2, that's not going to help anyone. The government could fund all of its debt at the T-bill rate but people with mortgages and other long term borrowers would, obviously, be left holding the bag. In my sense, if the Fed were to make political rate cuts rather than economically justified rate cuts it would have to almost immediately then do yield curve control, which is what the Bank of Japan has done over the years since 2013, what the Fed did back in the 1940s, and that, basically, is you're manipulating the curve so that long rates stay low. You anchor short rates at a low point, maybe you regulate the banks in such a way that you're sort of incentivizing or forcing them through reserve requirements to buy long paper in order to keep rates down.

[00:20:41] As I just said, the Bank of Japan has done that. If we go to slide 14 you can see that the BoJ, of course, has a massive amount of debt, far, far greater than the U.S., although the U.S. certainly is catching up, back in the 2010s the funding costs of Japan's debt as a per cent of GDP rose to about 4 1/2%. I think that was sort of the line in the sand. I wasn't there so I don't know, but at that point they started to do yield curve control. They, basically, capped long rates. The Bank of Japan, basically, bought every JGB that it had to. It ended up owning and buying about half the JGBs outstanding. That, basically, removed the Japanese bond market as an asset class that investors would buy for economic reasons or because yields were attractive, and it just became kind of this own thing. The U.S. did the same thing in the 1940s. At this point the Bank of Japan has been able to keep their funding costs pretty much level at about 4, 4 1/2%, the U.S. is now at 3.6 so you're getting into that zone.

[00:21:57] Would this be an option for the Fed if it was not quite as independent as it is now? It's not inconceivable. I mean, it sounds weird to even be talking about these things. If we go to slide 16, you look at the debt service in the U.S., it's 1.2 trillion out of a $7+ trillion budget. It's a meaningful number and it crowds out other spending programs whether it's defence or entitlements or what have you. Again, unless you cut spending you just have to keep issuing deficits in order to keep paying for that debt spiral, if that funding rate goes up a lot relative to the economic growth you can get into kind of a classic emerging market like debt spiral. Nobody wants to go there, of course. Again, I don't know what's going to happen, maybe none of this will be necessary, but if the Fed were to drop rates kind of beyond what is justified by the rules-based system only to help the Treasury borrow from the public or issue debt it will also have to manage the back end of the yield curve, otherwise, the curve would just steepen tremendously and it wouldn't solve any problems. Again, when you think about that scenario, there's no free lunch, something has to give.

[00:23:32] If we go back to the Japan scenario on 15, you can see exactly where it was that the Bank of Japan started to do its financial repression. It was around 2013. Its assets relative to GDP went from 25% to 132%. The Nikkei went up, it's at an all-time high so the stock market can do very, very well in this scenario because you have a very fiscally and monetarily stimulative backdrop. Maybe this is why the meme stocks are already running. This could be a melt-up type situation. Look at the yen, the currency had to pay the price for this. My sense is that the dollar would have to do the same in this kind of scenario. Of course, you have the risk that you really unanchor inflation if you have a runaway fiscal train. Those are some of the thoughts that I think of.

[00:24:30] I'll show you one more slide here, actually, two more slides. Slide 17 is the World War II period. We've unpacked that, you and I, Pamela, many times back during the COVID days because there were some real parallels then. During World War II, obviously, we had the war, we had a massive price shock because there were price controls. When those were lifted prices went up 20%. You did not get lasting inflation out of that because we were still on the gold standard and when the Fed was done monetizing the war debt we went back to surpluses from deficits and the money supply stabilized. That really was a transitory type of inflation. The 1950s were a very quiet period of low inflation, low interest rates and a booming stock market. It doesn't have to end well  but that maybe was one particular example of how it could end well as opposed to badly.

[00:25:35] When it ended badly, another example of that is slide 18, that was during the 1960s. Of course, the Fed was already independent then but there was lots and lots of influence peddling by administrations from both sides of the aisle to get the Fed to help finance the deficit. This chart is a little busy but in the top you see the inflation rate, in the bottom you see budget deficits in the blue, the Fed's policy relative to the natural rate in orange, that shows you above is restrictive, below is accommodative. The grey shadings show periods of when the economy was either growing faster than its potential or growing slower. We call that the output gap. That left box there on the left-hand side of the chart was the late 1960s into '70s. We call that the guns and butter era, we had massive chronic budget deficits because there was a real emphasis on full employment and the Fed was, essentially, way too accommodative considering that the economy was running well above its potential.

[00:26:58] You put those three things together and you're almost guaranteed to get a problem. You have loose monetary, loose fiscal and an economy that's running hot, you're going to get inflation, which is exactly what we did. Not saying we're going to have an exact repeat of that but the economy is growing beyond its capacity right now, or beyond its potential. Fiscal policy is loose, monetary policy is restrictive but if that were to switch, like in '26 or '27, and you've got those three things together it could create an inflation problem down the road. That's kind of how I think about unpacking this whole fiscal and monetary back and forth.

[00:27:41] Pamela Ritchie: That's absolutely fascinating. It's an interesting take on all this and everyone really needs to sort of keep some of these pieces in mind. With that, it sounds like bonds could have a rough go, obviously, if it's going to be inflationary. That could be a difficult moment. We only have a couple of minutes left, I'm just wondering, though, on the equity side, there is a question coming in about could increased momentum for U.S. equities also mean more momentum for international equities? There are questions about equities. Perhaps in that scenario, maybe we can just come back to what the equity market could see should all those things happen and maybe have a tough go for bonds.

[00:28:20] Jurrien Timmer: Let's go to slide 1, actually. This is the MSCI All Country World, and that's a good looking chart. This is a global bull market right now. 72% of stocks around the world are in uptrends. The red line is the global money supply. In this sense, if you have a fiscal boom in the U.S., and we might have fiscal boomlets in Europe and maybe in Canada because everyone will have to spend more, that red line is going to go up and the stock market will likely go with it. If the dollar is also going down you could see capital reallocation to other parts of the world just to get that currency translation. I think for equities, not only in the U.S. but around the world, it would be bullish until an inflation problem starts to affect valuations. That wouldn't necessarily happen right away. You can have kind of a melt-up scenario in this case. Again, you mentioned bonds, on the bond side, again, in Japan the bond market is not really the bond marketing anymore. There are days when bonds don't even trade. In the U.S. I don't think it would go quite that far. The Fed wouldn't have to own every bond, every Treasury, the banks would own some, investors would own sum as well. If bond yields, let's say, are kept at 4 when they should be at 6, let's put it that way, and the Fed, let's say, owns half or more of outstanding Treasuries, the bond market would still be functioning but the term premium would be very low so it would reduce some of the value for bond investors because the real yield would probably be lower. At the same time it wouldn't cause tantrums the way the bond market has done over the past couple of years. It will become a very boring asset class that just doesn't do very much. Again, I'm kind of projecting and speculating in all kinds of different ways, and who knows how this is going to turn out but it's good to kind of think about these things because, again, these days in 2025 nothing is really too crazy to think about anymore so we need to be prepared.

[00:30:32] Pamela Ritchie: Do you think that gold and Bitcoin and the way they've behaved have been partly thinking about a number of the things you just said there?

[00:30:42] Jurrien Timmer: Yes, they have been seeing this coming from a mile away. I think they would continue to see it coming. Gold flipped from trading as the inverse of real rates, which it always did before 2022, and then real rates went up and gold doubled, which should not have happened. Gold is trading on as the reverse of the dollar's reserve status, basically. Again, this notion of monetary inflation, big growth in the money supply and I think Bitcoin is doing the same thing. Yes, they are very much part of it. Real assets should do very well in this kind of scenario that I just described. Equity should do well but, again, inflation could come up and the dollar could go down. I think those are the two escape valves as you [audio cuts out]. You can control some markets but you can't control every market at the same time. There's a release valve and that probably is going to be currency and inflation.

[00:31:44] Pamela Ritchie: Fascinating. Wow, you have given us so much to think about and to sort of chew on as we go through this week ahead. Jurrien Timmer, thank you for your presence, thank you for your charts, thanks for being here today.

[00:31:55] Jurrien Timmer: Thank you. Have a good week.

[00:31:57] Pamela Ritchie: You too. That's Jurrien Timmer joining us here today. Tomorrow, Tuesday, portfolio manager and Chief Investment Officer, Chris Lee. He's going to be joining us to discuss his U.S. and global-focused funds. He'll also provide an update on Fidelity Advanced U.S. Equity Fund that launched earlier this year, share how Fidelity's proprietary fundamental research and quantitative capabilities come all together in this strategy that we'll talk about tomorrow.

[00:32:20] On Wednesday we'll be discussing the benefits of pair trade investing. This is with portfolio manager, Brett Dley. He runs the Fidelity Market Neutral Alternative Fund. Don't want to miss this conversation. He'll share his latest market opportunities for both long and short positions.

[00:32:35] On Thursday of this week, TD Bank chief economist, he was former, actually, Don Drummond, will be joining us on the show with both the Bank of Canada and, of course, the Federal Reserve rate decisions coming out this week. He'll share what it all means, ultimately. Take a look at the inflation trajectory, the actual decision, and what investors need to do as they look at the markets. Both those shows, Tuesday and Thursday, will be offered in live French audio interpretation so you can join us in either official language. Thanks for joining us. Have a good rest of your day. I'm Pamela Ritchie.