Rabobank: “I Love It When A Plan Comes Together”

By Michael Every of Rabobank

I love it when a plan comes together

“Do you remember where you were when it happened, old timer?”

“Well, let me see now. I think it was a Monday. Yes, a Monday. Monday 19 October 2020. That seems a long time ago now. But it’s still fresh as a daisy. You don’t forget something like that.”

“What was it like? It must have been a shock!”

“Oh, it was! Nobody knew Chinese GDP numbers could actually surprise to the downside!”

That’s right, young ‘uns. Mark the date in the calendar. Today saw a Chinese GDP print that seriously deviated from market consensus to the downside. The expectation had been q/q growth of 3.3%, when we actually got 2.7%; and for y/y growth it was 5.5% and we got 4.9%; and yet for y/y YTD growth of 0.7% – which somehow it managed to hit exactly.

Further eyebrows might be raised over the fact that at the same time almost everything in the September data beat expectations: industrial production was up 6.9% y/y (5.8% being the survey); retail sales were up 3.3% (vs. 1.6%); fixed asset investment was up 0.8% (vs. 0.9%); property investment was up 5.6% (vs. 5.2%); and unemployment was down a tick to 5.4% (vs. 5.5%). All in all this sets up China comfortably for the around 2% y/y GDP output predicted by the PBOC Governor yesterday.

What did Hannibal say in ‘The A-Team’? “I love it when a plan comes together.” I don’t think he meant the economy, however. Certainly don’t talk to the China Beige Book guys with their deep data-dive suggesting this is actually a two-tier, split-level  recovery, as everywhere else.

Naturally, this is giving CNY a boost, however. Because CNY always seems to be getting a boost at the moment. That is despite other headlines that might suggest one lean the other way: China recently implied a threat against all Canadians in the country over the Huawei issue; it has now apparently also warned the US that if America-based Chinese scientists arrested for espionage are charged, this would put all Americans in China at risk. On a parallel track, the US has taken a leaf from China’s policy book and is now to offer loans to developing countries to lure them away from Huawei’s 5G. If the US can tear up the laissez-faire playbook to offer cheap loans to other countries to buy telco gear THAT IS NOT MADE IN AMERICA, what does that tell you about what other playbooks it will be willing to tear up? It’s almost as if there is a Cold War splitting the world economy and ultimately blowing back to “we see no splits” markets.

The Lowy Institute in Australia has just published a report saying it expects China to overtake the US in economic power by 2030 (as the IMF estimate China is already a larger economy in PPP terms). Our ‘World in 2030’ projections said the same thing – if the US does not act to prevent it. But what does history say about hegemons sitting there and doing nothing vs. arrivistes? Don’t mention it to the FX and capital markets. They still seem to be paying as much attention to the global backdrop as Fox News did to Trump scandals over the past few years, and as the rest of the media is now doing to the Hunter Biden laptop story.  

Meanwhile, although it is of doubtful usefulness because of the polls doesn’t include, and because the polls it does are often doubtful, the Real Clear Politics average Biden lead in the key battleground states is now 4.3%, or close to the margin of error. There have even been press reports of the Biden campaign itself saying it is neck and neck. That has big implications for FX markets and geopolitics: and on more than one front.

Here’s an obvious example. US stimulus: Nancy Pelosi has now set an end-Tuesday deadline for an agreement to be struck pre-election. Unfortunately, Mnuchin is not in town to discuss things. So do we go big, or go home? And who will be blamed by those at home right now and waiting to vote?

Another is Brexit. The UK is throwing down the Hard Brexit gauntlet to the EU; they must blink, because the Brits aren’t going to. There will be apparently be none of the promised talks this week, and Hard Brexit looms, which is now being called an Australian deal. (Note for Brits that no longer learn any history: being sent to Australia used to be a punishment and not a reward.)

Guess what? This outcome was always blindingly obvious. It makes Boris look tough at a time he is weak; France may not actually mind a Hard Brexit if this places Paris in the driving seat of a necessarily more geopolitical, less Germanic EU, say some; and the US election runs through everything like letters through a stick of rock (a traditional British hard candy designed by dentists, and guaranteed to put their kids through medical school). Why would the UK agree to trade terms with the EU when they don’t know who will be US president? After all, Trump is offering a quick deal (chlorinated chicken and all, say critics); Biden has made clear this won’t happen fast, if at all. Doesn’t it make more sense to stall for two weeks before committing to the EU framework?

In New Zealand, Labour’s Jacinda Arden won a huge post-Covid victory and now has to decide how to govern: solo, or coalition; centre, or left? And what will she decide about offers to join China’s Belt and Road when she doesn’t know who will win the US election and what the regional environment will then look like?

Europe will also be worried. They already have a second virus wave swelling higher, the risks of a double-dip recession as a result, potential Hard Brexit, and that US election which they cannot predict, but where they clearly favour only one outcome. No wonder the ECB this morning is talking about its toolbox not being exhausted and being able to do more if needed; and even adding there should be discussions about the Covid recovery fund being made permanent.

Don’t forget Japan just saw exports -4.9% y/y and imports -17.2% y/y too, the former worse than expected. How long until new monetary and fiscal stimulus is needed there too?

In short, it’s still all highly uncertain out there. (I haven’t even mentioned the political instability in Thailand, for example.) It is therefore possible to join the dots and make a case that you want to be holding CNY as a safe haven.

Yet US retail sales growth y/y is higher than in China, if you want to talk about pure bouncing back and a consumption-driven recovery, which is today’s market meme; and, as is often repeated here, there are potentially very fat tail risks not far ahead that can shock even more than Q3 Chinese GDP just did. Those both still suggest USD will benefit most ahead.