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A Deteriorating US Current Account Deficit

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A Deteriorating US Current Account Deficit

Louis-Vincent Gave
4 Sep 2025
In the first quarter of 2025, the US current account deficit hit 6% of US GDP. Today, with the US government no longer keen on cutting its spending, US demand is running hot. And if US courts strike down tariffs it could get hotter. This suggests the current account deficit could grow even further, pumping ever more US dollars abroad, just as demand for dollars appears to be moderating. Louis examines the consequences.
Abduction

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Abduction

Didier Darcet
4 Sep 2025
The American philosopher Charles Sanders Peirce argued that abduction—not deduction or induction—represents the primary mode of human reasoning. For Didier, abduction lies behind scientific discovery, as well as most economic, financial and political analysis. In this piece he applies this insight to current dilemmas for portfolio managers.

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A Demand Spark For European Industry

Cedric Gemehl, August Gudmundsson
4 Sep 2025
Sometimes marginal changes tell the most compelling story. Consider the eurozone’s industrial sector, which in August saw the manufacturing PMI tick above the 50 no-change mark for the first time since June 2022, thus ending a 37-month period of continuous contraction. Should we trust the PMI signal and conclude that European manufacturing is finally set for a period of expansion? Cedric and August say it is a tricky judgment, but most likely, yes.

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Video: Eurasian Partnerships On Parade

Tom Miller
3 Sep 2025
Wednesday’s grand military parade through Beijing and the earlier Tianjin summit of the Shanghai Cooperation Organisation, hosted by Xi Jinping and attended by both Narendra Modi and Vladimir Putin, have emphasized the growth of economic partnerships on the Eurasian landmass in defiance of the established US-led international order. In this video interview, Tom Miller assesses the depth of India’s diplomatic reengagement with China, and considers the economic implications of the strengthening Eurasian relations.

Checking The Boxes

Our short take on the latest news

Fact
Surprise
Takeaway

US JOLTs job openings fell to 7.181mn in Jul, from 7.357mn in Jun

Lower than 7.4mn expected

The decline in job openings increases the probability of a September rate cut

EZ PPI rose to 0.2% YoY in Jul, down from 0.6% in Jun

Above 0.1% expected; MoM, PPI rose 0.4% in Jul, down from 0.8% in Jun

This signals that disinflationary momentum has stalled, with the energy drag unwinding

Sweden services PMI rose to 53.4 in Aug, up from 49.0 in Jul

N/A

PMI to improve further as cyclical recovery gathers pace

Vietnam S&P Global manufacturing PMI fell to 50.4 in Aug, from 52.4 in Jul

N/A

Despite the increased tariffs, Vietnam manufacturing sector remains in decent shape

Test Your Knowledge
In 2014, China’s military boasted 2.3mn active military personnel. How has that changed a decade on?
  1. Decrease of -298,000 personnel
  2. Increase of 105,000 personnel
  3. Increase of 460,000 personnel
Post Your Answer

Chart of the Week

Week 36, 2025
There are several potential drivers of China’s recent equity-market rally, ranging from optimism about artificial intelligence to a reach for yield among household and companies. But the focus of attention is on the policy campaign against “involutionary competition.” It’s the most plausible cause of both the rally in Chinese risk assets and the sharp pullback in many economic indicators. The problem is that it’s not yet clear which of those effects will dominate.
Open Chart

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Essential Reading: A Book For Every Week Of The Year

Gavekal is often asked for a recommended reading list. So, here it is: a book a week that everyone interested in the world of macro investing—whether hoary veteran or eager apprentice—can benefit from reading.

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Webinar: Gimcrack Goldilocks Or The Real Thing?

Arthur Kroeber, Will Denyer, Tan Kai Xian
11 Jul 2025
So far in 2025, the US economy has defied all the worst-case forecasts of looming stagflation. In this Gavekal webinar, US economists Will Denyer and Tan Kai Xian assess the strength and depth of this apparent Goldilocks dynamic, consider the impact of the newly passed Big Beautiful Bill on the US budget, and discuss the implications for financial markets. Gavekal head of research Arthur Kroeber offers updates on the tariff war latest.

Tariff Troubles

Geoeconomic Monitor: Understanding The New Trade Regime
In today’s Monitor, we continue our analysis of what Donald Trump’s new trade regime means for the world economy, explain how Indian prime minister Narendra Modi blundered and wound up facing a 50% tariff, and argue that none of the conditions for a quick end to the Russia-Ukraine war are in place.
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Where Tariffs Leave US Industry
Late Thursday the US president signed two executive orders cementing—for now—the new tariff rates announced piecemeal over recent days in a series of social media posts and bilateral deals. The higher tariffs on imported inputs are but one part of a broader story that is shifting the narrative for US manufacturing. In this Daily, Kai Xian examines the other factors.
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Japan’s Flaky Trade Deal
The US-Japan trade deal announced late Tuesday in Washington triggered a powerful rally in Japanese automaker stocks. But the anomalies and distortions implied by the limited details of the deal so far available mean the provisions of this “framework agreement” are unlikely to survive in their current form, warns Udith Sikand.
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Geoeconomic Monitor: Digital Currencies And Financial Power
As US lawmakers aim to fast-track legislation aimed at encouraging the development of privately issued cryptocurrencies, Arthur Kroeber assesses the probability that digital currencies will upend the established US-dollar-based international financial system. Separately, Tom Holland examines the likely effectiveness of US secondary tariffs aimed at curbing Russia’s energy exports, and Tom Miller takes the temperature of the political waters across the Taiwan strait.
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US economy & markets

US Businesses Will Pay
In the spring, when the US government was pushing to both cut taxes and lower long-dated bond yields, Louis noted the emergence of a “foreigners will pay” approach. It seems the same logic now applies to US companies. While there are plenty of reasons to be positive on US stocks and corporate debt, Kai Xian argues this trend presents several considerable risks.
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US Credit Spreads On Borrowed Time
As US equities advance to new highs and politics keep investors spellbound, US credit spreads can go unremarked. That might be a mistake. Historically, corporate credit spreads have been strongly mean reverting, so the currently tight spread could widen in the short to medium term.
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How Trump Could Pack The Fed
In 2019, US President Donald Trump tried to pressure Federal Reserve policymakers to stop hiking interest rates. That effort failed, and in 2025 Trump has again struggled to get Fed Chair Jay Powell and co. to do his bidding. In response, Trump seems to be trying to pack the US central bank with White House loyalists. Will explains the narrow path Trump must tread if this effort is going to work.
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So Long, Average Inflation Targeting
The market has focused on what Jerome Powell’s Jackson Hole speech on Friday implies for the probability of a rate cut on September 17. But more interesting and potentially much more consequential was what the Federal Reserve chair’s words meant for the Fed’s long-term policymaking framework.
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China chartbook

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The Financial Risk Report 2025

Xiaoxi Zhang
28 Aug 2025
China’s banking system faces fundamental strains that mean the rapid credit growth of the past 15 years cannot continue. Low rates are compressing margins, making banks less able to finance themselves, while potential bad loans are piling up. A new round of bank bailouts in 2025 shows the government recognizes the problem, and will keep the banks stable for now, but not forever. In her annual update on the health of China’s financial system, Xiaoxi explains why this year’s bank bailout will not be the last.

India chartbook

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India Macro Update: Hold The Confetti

Udith Sikand, Tom Miller
5 Jun 2025
India’s economy is in the early stage of a cyclical recovery enabled by supportive policy settings. Sustaining the positive momentum will, however, be tricky, say Udith and Tom. A continued recovery in domestic consumption is encouraging, but external uncertainty could dampen sentiment and weigh on investment.

Latest video

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Video: Eurasian Partnerships On Parade

Tom Miller
3 Sep 2025
Wednesday’s grand military parade through Beijing and the earlier Tianjin summit of the Shanghai Cooperation Organisation, hosted by Xi Jinping and attended by both Narendra Modi and Vladimir Putin, have emphasized the growth of economic partnerships on the Eurasian landmass in defiance of the established US-led international order. In this video interview, Tom Miller assesses the depth of India’s diplomatic reengagement with China, and considers the economic implications of the strengthening Eurasian relations.

Strategy Chartbook

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US Strategy: The Equity Rally’s Drivers And Threats

Will Denyer, Tan Kai Xian
29 Jul 2025
Having underperformed in the early part of 2025, US equities are back to outperforming. This is an issue for investors who had begun to see the US as uninvestible. With the much-maligned Federal Reserve having seemingly pulled off a soft landing, the rally has been aided by Goldilocks-type macro data. What comes next depends on how growth-boosting drivers like bank deregulation run up against short-term threats such as fiscal drag. There are good reasons to think US equities will hit fresh highs, yet risks loom.

Emerging markets

Video: Are EMs Back?
It’s been a good quarter for the broad emerging markets complex. The MSCI EM index has returned almost 7% in US dollar terms, while US equities are down by some -3.5%. So should investors jump on the EM train? Udith points out that there is a wide divergence in the performance of individual emerging markets, and the threat of tariffs hangs heavy over EM corporate earnings. Investors need to be selective.
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Video: Southeast Asia Under Trump 2.0
Global investors are rightly focused on the potential losers from the United States pursuing an aggressively protectionist trade policy agenda, but there may be winners as well. Tom went in search of such economies last week. Today he explains how such “swing states” are likely to perform in an intensified period of great power rivalry between the US and China.
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China Turbocharges EM Investment
As the rich world pulls up the protectionist drawbridge, investors risk missing a bigger story in emerging markets. Here, Chinese outbound investment is rebounding after the fallow Covid years, and is driving a new wave of industrialization that promises to lower the cost of the green-energy transition.
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Why This Time Has Been Different
During past episodes of risk-off volatility, the correlation between emerging market risk assets has shot up. But early August’s bout of market volatility saw a bifurcation in EMs, and no broader macroeconomic spillover effects—which speaks well of the growing maturity of emerging markets as an asset class.
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Europe's economy

A Demand Spark For European Industry
Sometimes marginal changes tell the most compelling story. Consider the eurozone’s industrial sector, which in August saw the manufacturing PMI tick above the 50 no-change mark for the first time since June 2022, thus ending a 37-month period of continuous contraction. Should we trust the PMI signal and conclude that European manufacturing is finally set for a period of expansion? Cedric and August say it is a tricky judgment, but most likely, yes.
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French Political Risk Resurfaces
France’s stock and bond markets have reacted negatively to Monday's news that the government of prime minister François Bayrou will face a September 8 confidence vote in the National Assembly. In itself, this fresh crisis is unsurprising. The plot twist is that it is Bayrou himself, not France’s opposition parties, that has called the vote. Cedric maps the potential outcomes.
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Three Stages For A Rally In Euro Assets
So far in 2025, global investors have warmed up to the eurozone’s economic prospects and financial assets. Yet after rapid gains in the first half of the year and a recent pullback in the single currency, those who stayed on the sidelines are asking if this is as good as it gets for eurozone equities—or if there is still time to join the rally.
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The EU Labor Market’s Cyclical Bottom
A curiosity of the European Union economy over the past three years has been the labor market’s resilience in the face of multiple shocks. At 5.9%, the single market area’s unemployment rate was near a historical low in June. There are, however, reasons to be skeptical about such apparent aggregate stability.
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Equities

Convictions And Concerns
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From Return OF Capital To Return ON Capital
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Three Stages For A Rally In Euro Assets
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Video: The Fed Shakeup And US Equities
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US Strategy: The Equity Rally’s Drivers And Threats
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Playing Asia From Afar
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Fixed income

US Credit Spreads On Borrowed Time
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French Political Risk Resurfaces
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Convictions And Concerns
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The Government Bond Risk Premium
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US Strategy: The Equity Rally’s Drivers And Threats
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Down The Drain
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From the archives: oldies but goodies

Deficit Deniers Of The World Unite
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Deficit Deniers Of The World Unite

Anatole Kaletsky
In our politically correct age the pressure to bow down before certain popularly accepted and apparently proven “truths” can be overwhelming. In the aftermath of the US elections, two such nostrums are unnecessarily vexing investors—the urgency of deficit reduction and fear of higher taxes. I believe that both of these obsessions will soon be forgotten.
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Are We Entering into Revolutionary Times?
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Are We Entering into Revolutionary Times?

Louis-Vincent Gave
The role of a society’s elite is to rise to the challenges of the times, and find solutions fitting to those times, even if this involves a radical break with the past. But the modus operandi for most leaders is to try and maintain the status quo. But if the problems are large enough, this does not work, and the same challenges reappear until either a solution is found, the elite is replaced by a new elite, or the country, system or civilization disappears.
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The High Cost Of Free Money
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The High Cost Of Free Money

Charles Gave
Perhaps the most famous economic law is the one that there is no such thing as a free lunch. By keeping US short rates at abnormally low levels beyond the financial crisis and as growth bounces back beyond the dreams of the wildest optimists, the Fed increasingly seems to be trying to ‘feed the US economy for nothing’. This is worrying, for extended periods of cheap money typically come back with a hefty price tag.
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