While We Wait

By Michael Every of Rabobank

While We Wait

It goes without saying that today will be all about US payrolls – more so after a bumper ADP print of 978K yesterday. Which means those of us in Asia face a long day of waiting ahead. However, we have enough to chew on in the meantime.

In the US, President Biden has dropped some proposed tax increases as part of the fiscal package he now seems less likely to be able to get through due to having less ‘reconciliation’ bullets than had been thought (or so says the Senate Parliamentarian). He’s apparently prepared to discuss a floor corporate tax rate of 15%, closing off loopholes and exemptions, rather than any increases. This would match the rate being proposed globally to be discussed at the G7 next week – and G7 finance ministers, including Yellen, will be meeting today in advance of the national leaders. Expect related headlines today and Saturday. The press reports the president also had a call with Larry Summers, who despite being regarded as the one who discovered “secular stagnation” (rather than Kalecki), is also a critic of current US fiscal stimulus plans.

On another front, the White House issued an executive order expanding, not reducing, the Trump-era list of Chinese firms off-limits to US investors due to their links to the Chinese military. There are 59 now named, including China Mobile and Huawei. US China hawks suggest this was actually a step backwards by not expanding the scope of the order, and excluding some candidates, but it is still not going to improve US-China relations. Then again, for those thinking this is bad, in the background former-President Trump has stated that China should have to pay $10 trillion in compensation for Covid-19 – and he still seems to have a lot of sway over the Republican party’s general line of thinking, so goodness knows where this all ends up.

Meanwhile, as supply-chain driven inflation continues to bite, a key world food price index just hit the highest level since the Arab Spring of 2008, a worrying trend we flagged as possible a few months ago. The correlation between expensive food and global political instability should be obvious as a huge threat ahead given there is no immediate sign of this trend reversing: except perhaps to those who never, ever go hungry, and who see not being able to go to their favourite restaurant on a Friday night, and having to order in instead, as the real punishment.

On which relative ‘First World Problems’ front, the UK is up in arms because Portugal has been removed from the government’s ‘Green List’ of summer holiday destinations at the last minute due to a surge in worrying new Covid variants – the logical result of Portugal opening up to global tourism before it had been fully vaccinated. That basically leaves Brits with the choice of Iceland (population: 300,000 – so bring a sleeping bag), or Israel (which isn’t at war this month – so far), or the windswept Falkland Islands. Or Devon and Cornwall – like the G7. So time to go long cream teas again. And at least all the stimulus money is circulating at home, as any good proponent of MMT knows it should.

But more serious news stems from the Taiwanese port of Kaohsiung –the 14th busiest in the world, just behind Antwerp, and well above LA at #17– where a Chinese-owned vessel collided with a Taiwanese one, causing substantial damage to the port itself. Without getting into any (more) finger pointing, the last thing strained global supply chains needed to see was another major port facility operating at reduced capacity – and yet that is what we just got. Taiwan seems to be having a really bad run of logistical luck in the past few months.

And on strains, both geopolitical and supply-chain, yesterday saw bombshell news from the EU too: Europe plans to impose carbon emission costs –read tariffs– on imports of iron and steel, aluminium, cement, fertilisers, and electricity, potentially starting as soon as 2023. In other words, as was promised in the Commission’s early 2021 trade review, the EU is serious about ensuring it does not spend its money on goods produced by ‘dirtier’ economies. The question is if this really goes ahead, and if it stops at the above list of goods – because almost everything can be produced sustainably or unsustainably; and if the US then follows, setting up a new “Greenies vs. Meanies” world trading order. The key point for markets is that global supply chains will not have fully recovered from the current disruption by the time new structural changes may then kick in.

And on structural changes, one also has to note Russia taking the decision to strip the USD from its sovereign wealth (“National Wellbeing”) fund’s $186bn holdings. (Yet note which currency I just had to denominate the soon-to-be-dollarless entity in.) It will instead shift to a basket of Euro (40%), Yuan (30%), Gold (20%), Yen (5%) and Sterling (5%: “Go, Global Britain, Go!”, as Russians clearly really like Cornish/Devonian cream teas too). And so begins a great global game of pass-the-parcel, as everyone else who still does use the dollar has to end up making those dollar transactions for Russia instead.

Lastly, a lot of ‘things’ happened in meme-stocks, which would require a separate Daily of its own to do justice to, but isn’t the primary focus here.