“Every Day Brings Shocks For Those Paying Attention”

By Michael Every of Rabobank

Yesterday’s European inflation data surprised to the upside. Who could have known that inflation would not just fade away, as the market tried to peddle two months ago? We have more key numbers to focus on today, including German CPI and global PMIs, but it would take a shock along the lines of what we just saw in Aussie CPI (7.4% y-o-y vs. 8.1% expected despite the surge in that month’s retail sales) and GDP (Q4 0.5% q-o-q vs. 0.8% consensus, in line with y-o-y expectations at 2.7%) to shift sentiment back towards the median ‘2023 Outlook’ view of disinflation and a looming rates pivot. I have been mocking that in my own counter-outlook presentation called ‘The Pause That Doesn’t Refresh’. Data like China’s PMIs (manufacturing at 52.6 vs. 50.6 expected, services at 56.3 vs. 54.9 expected) are certainly not going to refresh any disinflation or rates pivots calls – unless they are just to freshen up the atmosphere at the National People’s Congress starting this weekend.

Indeed, the big picture still matters more. Much as I try to veer away from what I’ve flagged would be THE topic since early 2016, the news-flow doesn’t let me: the Global Markets Daily is increasingly the Deglobal Markets Daily. The global architecture shifting rapidly. And when I say rapidly, I mean *every day* brings shocks for those paying attention. Then, after a lag, shocks for markets not paying attention. So what is new in the last 24 hours?

First, the new US House committee on the Chinese Communist Party’s threat to America is underway: as I type, witnesses are pushing for a massive increase in US military spending; an urgent investment in Taiwan’s defences; preventing US supply-chain vulnerabilities stemming from China; breaking China’s Great Firewall; and blocking Chinese investment in US agri. Second, the word on the street is that if the White House executive order to impose capital controls on US firms investing in China is more limited than first floated, Congress will impose its own tougher version. Third, the Wall Street Journal reports the US may revoke export licenses for Huawei. Fourth, any US chipmaker given part of the $39bn Federal funding for onshoring is to be banned from expansion in China for a decade.

But it gets worse. Ignored by the mainstream media and most of social media despite officially running in 2024, and some polls showing he could win, former President Trump just launched his trade plan that “takes a SLEDGEHAMMER to Globalism” via “Universal Tariffs” – “Total Independence From China” – “Patriotic Protectionism” – “Reviving Mercantilism for the 21st Century”. In short, his proposed “America First” policy would phase in a system of universal, baseline tariffs on most foreign products, the revenue from which would reduce taxation on firms producing in the US. Moreover, tariffs “would increase incrementally depending on how much individual foreign countries devalue their currency.”

Honestly, I am not shocked. I am sure no other markets Daily uses the word “mercantilism” as freely as this one has for around a decade – I had to explain the word in 2015, and then how pre-WW2 US presidents were mercantilists; when Trump floated his first tariffs, I argued phasing them in to allow onshoring FDI before imported goods got more expensive would be logical; ‘Weaker currency = higher tariffs’ was factored into our report on ‘Balance of payments -and power- crises’; and clearly there is still US momentum to change things even if means breaking things, which we factored into our ‘The World in 2030’ report  – which we may arrive at early; moreover, as argued last year, and this, ‘Bretton Woods 3 Won’t Work’.

As Twitter discussions over this topic continue in less Trumpian size-100 font-all-caps-bold-underlined form, I think @matthew_pines summarises things, and the arguments in this Daily since 2014, when he notes:

“A key function of the economic system post China-in-WTO has been to allow western capital to (1) arbitrage labor costs & (2) grow FIRE sector to direct resulting USD mercantilist surpluses into scarce, desirable assets (NYC real estate, Ivy degrees, UST/Agencies, farm land).

(1) has just about reached its limit, and (2) will face headwinds (if not outright reversal) for national security and domestic political reasons. What new system will result? TBD, but these shifts typically don’t happen smoothly (or peacefully)…”

That’s as this weekend’s National People’s Congress in Beijing is set to see an overhaul of China’s government agencies, including the PBOC, key industries and sectors, bringing them all directly under the CCP in a “relatively intensified” manner, in Xi’s words. What this means is the CCP, not state institutions, will be running things openly from hereon out. These changes will affect the interests of many, he added. And not only in China.

Meanwhile, things are already the opposite of smooth and peaceful in Russia-Ukraine. Look at headlines like:

• ‘Lukashenko Proposes Unifying Russia, China, and Belarus’ Industrial Policies’; or

• ‘Russia’s Medvedev floats idea of pushing back Poland’s borders’; or

• ‘Putin orders tighter security at Russia-Ukraine border after spate of drone attacks’.

It should be screamingly obvious that all of the above has an structural inflationary implication far above what we just saw in France and Spain, or may see elsewhere this week. Indeed, in an argument running parallel to that of Matthew Pines, but absolutely linked to it, @S_Mikhailovich notes:

“40 years of falling rates were the engine of financialism – optimizing the real economy around leveraged finance and asset prices. Without the ever-falling rates, financialism is over. The next 40 years can’t be like the last 40. Investors are yet to see it.”

So, is this the Deglobal Definancialisation Markets Daily? That might sound like biting the hand that feeds, but it’s actually trying to guide that hand to avoid it getting bitten off entirely.