By Michael Every of Rabobank
The January Chinese CPI print came in weaker than expected, dipping back into deflationary territory y/y, though PPI was up from -0.4% to the heady heights of 0.3% y/y, which for ‘build it and they will come’ China is quite rare. Clearly though, even the massive liquidity being poured in via aggregate financing and local governments –the IMF estimate of the consolidate fiscal deficit is -18.8% of GDP in 2020, which gets no market fanfare at all!– is only seeing a patchy recovery at best. As they try to keep that liquidity out of the overheating housing sector and indebted household sector, expect more chills.
At the same time, US CPI also surprised to the downside. Headline inflation was 0.3% m/m as expected, but core CPI came in weaker at flat m/m, with December revised down to the same. In y/y terms that meant headline and core inflation at 1.4%, the latter vs. 1.6% expected. In short, inflationary pressures on the high street appear to be cooling off too. On one level that is USD negative because it is further reason for the Fed to not act for years. On another level it could be seen as USD positive, as if sustained it will reduce the level of negative real rates vs. economies such as the Eurozone. Perhaps it’s not a surprise that the USD ended little changed overall.
The Fed’s Powell then stressed we will probably see an increase in inflation readings in coming months “that won’t mean much.” So getting hotter – but please let’s focus on the colder parts. He underlined the US economy is 10m jobs down on where it was a year ago: and let’s recall that to replace them by end-2022, and account for natural labor-market growth, means we will need an average payrolls figure of over 500,00 through to next December. That’s an awful lot of heating up. Of course, markets will continue to do all the heating for the labor market, and very happily. Like a microwave meal, we are overheating some parts and leaving others cold: no central-bank rhetoric is capable of stirring things – is the government? Economies outside the US have to cope with a weaker USD, which is reflationary for stocks and commodities, but deflationary for their exporters; and with a trend higher in US long yields dragging theirs up too, so tightening financial conditions further. Hot and cold – and hardly edible to anyone but said markets.
Bitcoin continues to get hotter, thanks to Elon Musk: and so does the planet. Musk isn’t the blushing kind, but as a leading environmentalist even he might rouge at a Bloomberg story quoting University of Cambridge research that nearly 66% of global Bitcoin is mined in China, of which one third comes from Xinjiang province, where the electricity is powered by coal (and that much usage is, according to another source, unlikely to happen without official approval: so the crypto ‘libertarian charm’ cools in tandem). Meanwhile, in geopolitics things are both hot and cold for markets too:
Reuters reports “BOE’s Bailey warns EU not to pick a fight on finance”. Yet we can expect exactly such tensions. History shows either the UK and EU are bosom buddies, which Brexit makes hard, or they both have an interest in the other doing relatively less well. How can Brexit be sold as a success at home if the EU is booming? How can the EU be sold as a success at home if the UK is booming? It’s zero sum politically. More so if the US loses interest in keeping the EU as an ally, as threatened under Trump: the UK could then be used as a local spoiler. “Because” markets are slow to gasp what relevant experience should make abundantly clear. For them it’s just about UK seafood exports to the EU slumping, when there is far more to get ‘crabby’ about than that.
On that US-EU front, news this week was that Germany allegedly offered USD1bn to the Trump White House to allow them to proceed with NordStream 2 unhindered. Wolfgang Munchau underlines the long-standing view here that the Trump geopolitical position on Germany not tying itself in to Russian energy supplies is not going to change under President Biden; and such Merkel-cantilism is in trouble despite Berlin now claiming they are obliged to buy Russian gas as compensation for the 20m Russian war dead in WW2(!): if that is the line of thinking, why not build a pipeline to Israel? Munchau suggests the compromise may be Germany splitting its LNG orders 50-50 between the US and Russia – which would be hugely expensive for German industry: no NS2, and the German economy could take a major hit, taking global inflation down with it, even as headline inflation could rise.
Meanwhile, the Biden White House has an assembly line of other issues to deal with as it is tested, like all new administrations, and not just by empty rhetorical flourishes.
- N Korea calls the US its greatest enemy and is flaunting its missile, submarine, and nuke plans. No US response so far;
- Iran is talking about a new push for a bomb, refusing to return to the 2015 nuclear deal on the old terms without the US removing all sanctions first, and after President Biden called for an end to the Yemeni civil war and removed an Iranian-backed Houthi group from the terrorism list, the Houthis just carried out a terror attack on a Saudi airport. That backdrop will help push oil prices up, so making headline inflation hotter and core inflation colder, and also making it even harder to sustain 500,000 US payrolls every month to end-2022 (unless there is a big step-up in fracking, which just got limited on federal land by executive order?);
- Turkey, clashing with the US over S-400 Russian missiles, has reportedly just sent paratroops into Iraqi Kurdistan to fight PKK forces – what will the US response be, if so?;
- Russia is ignoring street protests over the arrest of opposition leader Navalny, but the public humiliation of EU Foreign Affairs spokesman Borrell in Moscow is allegedly going to accelerate the passage of EU Magnitsky sanctions (yet is this compatible with German reliance on Russian gas?);
- Coup leaders in Myanmar are also shrugging off public protests, but now face US sanctions – forcing the army, a group sceptical of China, to move closer to Beijing, and potentially tipping the balance in the region further away from the US;
- At home, President Biden has stalled the Trump-era forced sale of China’s TikTok. He has also –without fanfare– removed the Trump order that US universities must be transparent about their funding from China’s state-run Confucius Institutes. That’s in contrast to the UK’s national security swoop on its own academics’ China links, where 200 reportedly fear they could face jail, and the Canadian spy chief’s public declaration that Beijing’s “pursuit of power” presents a “direct threat” to it.) Biden’s first call with Xi will apparently come soon: is it going to be hot (green, cooperation, etc.) or cold (human rights, South China Sea, etc.), or a confusing microwave mix of both?; and
- Back to another fusion of geopolitics and seafood as New Zealand, which has refused to follow Australia’s hawkish line with Beijing (being willing to cut ties with Myanmar over human rights issues, but not with China), and which on Australia Day signed a deepened FTA, has seen two of its seafood plants’ exports to China blocked. Imagine what could be blocked if Wellington does ever follow a hawkish foreign policy line; yet not doing so further embeds a trade environment where this kind of occurrence is the new normal, and the room for strategic autonomy is further reduced.
Need I add that seafood and inadequate reheating in microwaves can prove toxic?