Submitted by Michael Every of Rabobank
The bent out of shape of things to come
If regular readers have not picked up on our view on US-China relations, it is that although just enough good will can be scraped together to kick the can down the road for 90 days, ultimately there is no US-China trade deal that can be done: those tariffs are going up from 10% to 25%. Fundamentally, this isn’t about trade from either side. It’s about geopolitical power. The US knows it. China knows it. Some market analysts know it, though far fewer will dare to say it publicly. But the markets as a whole certainly don’t want to know it – yet. That might be changing though.
We have just seen White House Economic Advisor –and likely one of those guys who does still think this is all about trade– Larry Kudlow say that there is “still a pretty sizable distance” between the US and China as we tick towards the midnight 1 March deadline. Cue market wobbles. The Wall Street Journal today has a story that US firms are phoning President Trump directly to lobby for a deal to get done. Presumably that is not a sign that things are going well. You don’t lobby when the ship of state is moving in the direction you like. And in the same article it is detailed that China seems to be confident that tariffs will come down by 2 March regardless of them not making any concessions. Pride cometh before the fall, as they say. Also perhaps a sign of concern, rather than imminent victory, a pro-trade lobbying group is saying that 934,000 jobs will be lost if the US does proceed with 25% tariffs. Two quick questions: why did the existing tariffs not cause any job losses in the US, but rather in China? And isn’t that just three-six months of job creation at the current pace, i.e., a blow, but one that the US could handle if it wanted to, if it is seeing this as a longer-run geopolitical struggle? Of course, for China, 25% tariffs would be ugly as a more detailed trade breakdown already shows that where they are at that level both import volumes and values are plummeting, while firms are shifting production outside China (i.e., the tariffs are working).
And then we get the news that Trump is NOT going to meet Xi after all. Surely that is as clear a sign as one could get that there is not going to be a deal done? That does not mean we won’t see a statement saying an extra 90 days with tariffs at existing levels is being allowed as a sign of good faith – provided firms keep moving out of China and redirecting their supply chains elsewhere, the White House can be reasonably happy. But this doesn’t mean a deal then gets done. Indeed Trump cannot be seen to cave on China by the Democrats, let alone his base.
That kind of worrying thought for markets materialises at the same time as European data get decidedly ugly (German industrial production yesterday was –0.4% for November) and as some central banks are starting to show us that panic is setting in.
The BoE left rates on hold due to the uncertainty over Brexit, which has its own fixed deadline at the end of March unless that can gets kicked. It also slashed its 2019 GDP forecast to 1.2% from 1.7%, which is slightly above our own forecast of 1.1%. As Stefan Koopman argues, a rate hike would have been on the cards if it wasn’t for Brexit uncertainties, but Brexit is the real deal. It now seems we won’t see a new vote on the rejected Withdrawal Agreement until late March, meaning last-minute brinksmanship from both PM May, with her own party, and the EU, with the UK. (And the EU is also looking even less happy internally, with France withdrawing its ambassador to Italy after Italy’s Deputy PM went to meet Yellow Vest leaders and declared “a new Europe is being born of the Yellow Vests”.)
Mexico left rates on hold, but is also leaning towards possible further tightening, as Christian Lawrence notes, but that makes it another stand-out.
India’s RBI surprised to cut rates by 25bp, presumably after agreeing with our own Hugo Erken on the gloomier outlook for the economy.
And the RBA’s Statement on Monetary Policy stated what has been obvious to others for ages: “…the Bank’s forecasts for consumption growth have been lowered. The outlook for consumption growth hinges on household income growth picking up, and by enough to offset households responding to falling housing prices by reining in their spending. Such a pickup in income growth seems probable given the improving labour market, but is not assured. In the context of high household debt, currently weak income growth and falling housing prices, the resilience of consumption growth is a key uncertainty for the overall outlook…. The current correction in the housing market is a significant area of uncertainty.”
In short, if housing is bust, either consumers ignore it, or so is the Aussie economy. If consumers do ignore it the next rates move, eventually, is up…but “If there were then to be a sustained increase in unemployment and a lack of progress in returning inflation to target, it might instead be appropriate to lower the cash rate.” And the RBA says it is 50-50 which scenario rules. The OIS is now pricing in a 76% chance of a rate cut by August, and AUD is back under 0.71. Frankly, unless Aussie consumers are as unreactive to bad housing news as they are reactive to good housing news then the question is when do we see sub-0.70? (….or 0.60?) It’s arguably only iron ore over USD90 due to Brazil’s problems that is cushioning the blow right now.
Meanwhile, we are already starting to see what the global policy response is going to be when things do go the way the RBA, and other central banks, don’t want them to. It looks like looser monetary and fiscal policy in tandem – and then some. The ECB is talking about QE curing inequality; the Fed is floating a trial balloon for negative interest rates; Larry Kudlow says another middle class tax cut is on the cards; and the US Democrats are talking about a USD4.6 trillion Green New Deal financed almost entirely by the Fed, in a WW2-scale fiscal-monetary operation. I don’t even want to imagine what the Chinese response is going to be if that is where the West is heading.
Keep trading those markets while you still can, folks.
via ZeroHedge News http://bit.ly/2DhYp2g Tyler Durden