Rabobank: “We Have Entered An Important New Phase”

Submitted by Michael Every of Rabobank

New Deals

End of June; end of Q2; end of H1; and the end of unrest in Hong Kong – or the end of Hong Kong as Hong Kong, depending on what you read. Lots of things for markets to ponder today against a backdrop of equities once again soaring and yet bond yields staying low: while the US 10-year is at 0.63% at time of writing, up 1bp, and vs. a 2020 low of 0.54%, the US 5-year is at its lowest ever at 0.28%.

In the US, Fed Chair Powell yesterday released the prepared comments to be used in his joint testimony –with Treasury Secretary Mnuchin– to Congress today. In them he noted: “We have entered an important new phase and have done so sooner than expected,” yet mentions “extraordinary uncertainty” over the outlook. On that note, it’s unclear if the “new phase” refers to the economic rebound or the virus second wave. (I joke: he refers to the economy, but underlines there is no true recovery without getting Covid under control. Even then, perhaps not: AirBnB’s CEO has just made some extremely gloomy comments on the outlook for the global travel industry, for example: “I will go on record to say that travel will never, ever go back to the way it was pre-Covid: it just won’t.”)

The Capitol Hill questions for Powell and Mnuchin today are obviously going to revolve around what happens next: specifically, how much more fiscally, and on what? With US unemployment support about to end in weeks, part of that answer would appear to be a no-brainer. Yet look at some of the US headlines today and so is the apparent push for a US troop escalation in Afghanistan in order to fight Russia. Regardless of where the stimulus goes, markets will want to see signs that more is coming. Soon. That’s true everywhere: UK PM Boris Johnson, who also wants to taper furlough support in weeks, is now trying to ape FDR rather than Churchill, declaring a British “New Deal” – which critics allege does not offer a great deal of new money. Let’s see if he can get the economy to take off as Leicester is locked down (again).

Meanwhile, the phrase “We have entered an important new phase and have done so sooner than expected” also applies to Hong Kong, where Beijing this morning passed the new national security law for it, which will be effective from tomorrow – when a mass public protest in defiance is possible. It would be nice to give you some details of the law – but we have as few as Hong Kong CEO Carrie Lam. All that is known at this stage is that the legislation will incur life imprisonment for certain transgressions; and that just before the law was passed the US formally revoked Hong Kong’s special status. Moreover:

• China has threatened to revoke visas for US officials wanting to visit Hong Kong, mirroring US restrictions on Chinese officials in the US – to which Secretary of State Pompeo has tweeted: “We will not be deterred from taking action to respond”;

• Hong Kong political activist Joshua Wong, among others, has just tweeted he has withdrawn from pro-democracy political group Demosisto; and

• Chinese imports of soybeans from Brazil were up 41% y/y to 8.86m tonnes in May while from the US they were down 50% y/y to 491K tonnes. Seasonal patterns play a role, but a whole lot of buying from the US is needed in H2 to keep on track with the phase one trade deal.

Of course, this is all being entirely shrugged off in Hong Kong markets. Indeed, China just announced the partial relaxation of capital controls between it and the mainland to try to boost its role as a financial hub. Specifically, HK can now offer wealth management services to rich mainlanders in the Pearl River Delta –those who lacked the initiative to get their gains into it anyway– which means CNY inflows, perhaps. Hong Kongers will be able to buy (opaque) financial products sold by Chinese banks meaning, if people bite, HKD (hence USD) flowing north. None of this answers questions about how HK will cope with no USD flowing *in* and/or USD flowing out, should US sanctions be imposed. As noted, this is being shrugged off “because it would be too damaging for the US”. Recall the same being said about US tariffs on China, and on Chinese action on Hong Kong?

Or Brexit, where face-to-face talks have begun in Brussels. Expect much talk of “level-playing fields” and fish.

“We have entered an important new phase and have done so sooner than expected” also applies to India-China, where both sides continue to escalate at various points along their long border. Trade relations are suffering further too as 59 Chinese apps are banned as “prejudicial to the sovereignty and integrity of India”. For his part, the Global Times editor is doing his usual exacerbatory job, tweeting: “Well, even if Chinese people want to boycott Indian products, they can’t really find many Indian goods. Indian friends, you need to have some things that are more important than nationalism.” And *that* is why the Indian press says not only does India not want in to the RCEP trade deal, but that it does not want to be reliant on China at all.

Which means more lifting for the Chinese domestic market – where data remain mixed. The June PMIs show a mixed bag. Manufacturing was 50.9, up m/m and slightly above consensus. New orders were 51.4 (again up), as were new export orders, albeit at a weak 42.6; but inventories at 46.8 were down, and so was employment at 49.1. The non-manufacturing PMI was 54.4 (also up), but while employment at 48.7 was higher on the month it still means jobs are being shed.

Japanese data today also underline the depth of the Q2 downturn: industrial production came in at -8.4% m/m vs -5.9% consensus and -25.9% y/y. Likewise, ANZ NZ business confidence was still -34.4 in June vs. -41.8 in May despite the virus having been beaten locally; and Aussie private-sector credit dropped 0.1% m/m in May vs a flat consensus and was 3.2% y/y, down from 3.6%, which will not help propel growth ahead.

In short, the month, quarter, and half-year all end with the virus mostly rampant and the economy mostly being propped up by fiscal stimulus we mostly aren’t guaranteed to see extended with new deals, as all the while geopolitics getting decidedly uglier. Yet markets are relying on their own unique take on the economy – and their take-away from central banks.

Oh, and a Great White shark warning has been issued for Cape Cod. Because we apparently needed more The-Mayor-of-Amity-saying-“Those beaches will be open for this weekend” memes.