by Michael Every, Senior Macro Strategist, Rabobank
Market comments
Chinese trade data yesterday were stronger than expected (exports up 32.2% y/y vs. 23% consensus, imports up 36.7% vs. 29.5%) but didn’t tell anyone anything they wanted to know about what will happen in H2 or 2022, which is what really matters. Especially with the headline that President Biden will publicly warn US businesses about the dangers of being located in Hong Kong.
The response of some US firms may be to leave; but many others will likely echo the thoughts of Jim McGregor, China chairman of APCO worldwide, quoted on Bloomberg: “America’s leading companies must be in the China market and have access to Chinese innovation in order to maintain global leadership. They can’t be forced into a choice between the US or China. They may have to create structural workarounds with spin-offs or stock listings that provide some separation between US and China operations if things get really dire.”
“Some separation”: two legal entities; two balance sheets because of clashing sanctions laws; two sets of data that can’t be shared; two paths for innovation because of tech controls; in two separate currencies because of capital controls; and perhaps forced into two separate supply chains due to political pressure. We are repeatedly told US-China decoupling can’t happen - how is the above not it? It’s also a relatively favourable one for China given it gets to Sinicize US firms while the US is extremely unlikely to Americanise the fewer Chinese firms operating Stateside.
The other big number yesterday was US CPI: just as markets had decided inflation is ‘no longer a thing’, it surprised hugely to the upside again. Headline CPI was 0.9% m/m vs. 0.5% expected, and 5.4% y/y, while core CPI was also 0.9% m/m vs. 0.4% expected, and 4.5% y/y. This moved US Treasury yields, with 2s up to 0.25%, 5s up 5bp to 0.85%, 10s up 6bp to 1.41%, and 30s up 4bp to 2.04%. The Dollar also moved higher, and equities had the temerity to go slightly lower.
Once again, around a third of the CPI increase was driven by used cars, and this is also going to get second-hand over time, so those base effects will bring inflation back down again in mid- 2022. However, the damage done to demand is still notable: real incomes continue to fall month after month. Also worth noting is that food price hikes will be coming to retailers soon as food producers’ 12-month commodity hedges roll off at far higher prevailing prices. That will ensure headline inflation remains high, but once again does not tell us what will happen in 2022. As on US-China trade, this remains firmly in the realm of the political.
As does monetary policy: as has been argued here for years, monetary policy is always political, because politics sets the framework for monetary policy. This was hidden behind a veil of technocracy and technobabble until recently, but rising inflation and asset-price inflation, and the policy choices implicit within, may now be lifting it for more of the public.
More directly, Atlanta Fed President Bostic yesterday stated that the world’s highest level of incarceration seen in the US “is a drag on our ability to achieve our maximum-employment goal,” and that “how we execute criminal justice inhibits global competitiveness.” Bloomberg reports the speech as the Fed saying incarceration is a “drag on US growth”; the Wall Street Journal that “Fed Officials Say US Legal System is Hampering Economy”. So do many other socio-economic factors – and the choices of which ones are and are not addressed will be political.
However, this does not seem to be a factor in the Fed’s near-term thinking on either tapering of QE or a rate hike. San Francisco Fed President Daly yesterday reiterated that inflation is still “temporary” (“transitory” was in the shop being serviced), but that QE tapering may start by year- end. However, she added it is “really premature to talk about rate increases” because of the threat posed by the Delta variant of Covid. Fed Chair Powell delivers his semi-annual testimony to the House today, which will not be a Humphry Hawkins so much as Harrumph-y Dove-ins: let’s see where he goes with what he says.
Meanwhile, Delta case numbers are surging in Europe and the UK, threatening reopening in the former, and anger; and in many struggling EM, threatening the combination of anger and hunger. Indeed, there are already street protests in Cuba and South Africa, and hunger there and in India, Indonesia, and even the empty tourist resorts of normally food-saturated Thailand. The UN just reported that world hunger already spiked in 2020 due to Covid-19, with nearly 10% of the global population undernourished - and that number will rise sharply in 2021 given what food prices have done and are about to do.
Amazingly, there has been no real push to vaccinate the crews on the vital global shipping fleets that take our food and other goods to customers around the world, threatening virus outbreaks there and further shipping delays,…and so further “transitory” inflation, and further hunger.
But, on the other hand, billionaire Richard Branson says he and Virgin Galactic are opening space for *everyone*: “Imagine a world where people of all ages, all backgrounds, from anywhere, of any gender, or any ethnicity have equal access to space. And they will in turn, I think inspire us back here on Earth." All ages, all backgrounds, from anywhere, of any gender, or any ethnicity who happen to have $250,000 to waste on a day-trip that is.
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