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The Week Ahead – 27 Jun 2022: The “R” Word

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Powell was out saying “I don’t think a recession is inevitable” but also admitted that rate hikes may be one of many factors that push the economy into recession. All of this while bank credit continues to grow, which we saw flatten in 2020 and decline in 2008. What’s happening? Is a recession inevitable at this point?

We talked about the dollar two weeks ago and the strength is still there. Are we pushing higher so commodities feel a bit cheaper to Americans? Is this temporary – mainly so Americans talk about cheaper gasoline over the July 4th holiday weekend? How far and how long do you expect the dollar to go? Why?

Can crude continue to rally into a recession?

Key themes:

  1. The “R” Word
  2. Geopolitical fallout
  3. Crude 💪 or 👎/ Dollar 🚀
  4. What’s ahead for next week?

This is the 23rd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon/

Time Stamps

0:00 Start
1:03 Key themes for the week
1:48 Powell’s recession call
3:48 The catalysts that could whip growth
6:58 Geopolitics in EMs and related to the US
8:35 Is the ECB a risk as well?
11:00 Crude and the Dollar
16:00 Where do you expect the dollar to go?
19:00 The week ahead

Listen on Spotify:

Transcript

TN: Hi, everybody, and welcome to The Week Ahead. I’m Tony Nash. We’re joined as always, by Tracy, Sam, and Albert. Thanks, guys, for joining us. Before we get started, please, like, please subscribe, please comment. We read all of them and try to respond to all of them. So please go ahead and do that while you’re here. Also, we are running a summer promo for CI Futures. This is our market forecast subscription product. You get three free months, so please go to completeintel.com/2022Promo and learn all about it.

So this week there’s a lot going on, a lot politically in markets, other stuff. We’re talking about three main themes this week. First is the R word. Second is geopolitical fallout of the R word. And third is crude and dollar activity. So I ran a poll earlier this week asking what is the most widely held consensus view that people are seeing right now? And that’s on screen, of course. So first is recession. People are seeing recession as a consensus view all over the place. Next is equities lower, followed by crude higher, followed by a stronger dollar. So we’re going to talk about all these things today.

Sam, let’s talk about that recession call. That recession consensus call. Powell is out this week saying, I don’t think a recession is inevitable after being really hawkish last week and driving people kind of to the edge of this. So what’s actually happening right now? We’re seeing credit continue to grow. And I know I showed you earlier this week. Bank credit continues to grow. Is that meaningful? And what are you looking at to know if we’re going into recession or not?

SR: Yeah, I mean, bank credit, is meh. But at the same time, are we going into a recession? Meh. I don’t really think so. It’s a booming summer. You have hotels full, you have bars and restaurants full. You have airlines unable to keep up with demand. I mean, that sounds like a small subset of the economy, but at the same time, that is a massive portion of the summer economy. It’s massive. So do I think we’re imminently in a recession? No. I actually think that’s one of the big narratives that kind of misses the bigger point, right? Do we make goods? No, we don’t make anything. What we do is we have services. That’s it. So we’re a service based economy. If services are booming, you’re not going into a recession. You’re unlikely to see some sort of huge move in unemployment because a recession technically is down on growth, down on employment.

If you don’t have the down on employment, you don’t have a recession. So maybe you have a slowing of growth. That’s somewhat probable. But a recession, no, not in the cards, at least until the back half this year. In the back half of this year, you have a number of catalysts which could really whip things the other way in terms of both growth.

TN: Okay, so what are some of those catalysts. And when you say back, you’re talking about October? November?

SR: Yes, October. November.

TN: My thinking is if we’re going to see it, we’re going to start seeing it maybe late September, October or something like that. But what are some of those catalysts you’re talking about? A couple of them?

SR: The catalysts then are actually to the gross side, which I think is where I’ll take the opposite side of a lot of people. Those catalysts are called a devolving of the Ukraine conflict. Number one, while that doesn’t take off sanctions in the near term, it does take off the incremental oops.

Then you have the beginning of the reopening of China, which is a big boost to growth in Europe, and secondarily, LatAm and the United States. So you put those pieces together and all of a sudden you’re looking at a back half of the year that has more upside catalysts, potentially. And it’s not like you can reset down China and it’s going to be a negative callus. It’s already in the numbers. It’s not like you can have another war in Ukraine that’s already in the numbers. If you begin to have those two come together, guess what? That’s positive. So I would say the rest of this year is shaping up to be oddly positive.

TN: Yes, but no, I’m kidding. Everyone’s so negative right now. Everyone wants to just find the downside. Russia is going to invade finland or something like that, right?

SR: Yeah. Here’s the play. I would say 3600 is a lot less likely than 43.

TN: I like that.

SR: On the S&P.

TS: I think what we’re going to see is kind of like a balance, right? Where we see services really big this summer, especially in the travel industry, hospitality industry, which we will see taper off this fall, which is not unusual. That always tapers off this fall. But we also see airline prices increasing, so people have booked their summer vacations in Q1. Those people are going to fall off. So I think we’ll see a push. We’ll see a pullback in that industry, but we could see growth in industries that Sam is mentioning.

TN: Great.

SR: Just to throw in there, we have to remember that at some point we have to refill supply chains on the drivable stuff, and those supply chains are at bone zero right now. It will require a whole bunch of employment, a whole bunch of production, and will actually have a fairly significant thrust to GDP. Our production has been zero.

TN: That’s great. My poll is wrong, which is awesome. I love that.

SR: I would bet against every single thing that your poll said.

TN: Perfect. I love that. Okay, so if you’re in the US, that holds. But let’s switch, Albert, to kind of say geopolitical risk and some other things. Obviously, Sri Lanka two months ago started falling apart and not started, but really fell apart. We’ve seen Ecuador and other places really start falling apart.

Albert, what are you seeing, geopolitically, and what are you seeing in EMs related to what’s happening in the US?

AM: I don’t really like focusing on EMs at this moment just because they’re not big enough to really cause a problem in the markets. In my opinion. I’m looking squarely at the European Union right now.

It’s suspicious that we come out with US bank tests and then we come out with EU bank tests and then literally a day later, the Germans come out and say, we could have a Lehman moment across the economy just because of these gas shortages that are happening.

TN: By the way, your tweet about the German Lehman moment up.

AM: Yeah. And this goes back to just the topic we were just talking about, recession. You really need some kind of catalyst or something to break. And the only thing that I could even contemplate of breaking and causing a “recession” would be the European Union going through another financial crisis. You have a contagion that probably leaks over to the United States financial markets and the Putin price hikes become a thing again, justifies any kind of QE that the Federal want to do, probably in Q four this year. Geopolitically, the EU is my target right now to look at.

TN: Okay. It’s energy supply chains. Is the ECB a risk as well? Is there a risk that they tighten too fast or too much or anything?

AM: How are they going to have to I mean, the inflation over there is climbing just as fast as the United States and it’s causing problems across the board.

SR: I would double down on that and say that Qatar, right after we had the train go down in Corpus Christi, came out and said, yeah, we’ll send gas to the European Union. Just sign a 20 year deal.

TN: Right. And they did. Right?

SR: European Union is not going to do that. I mean, nobody in Europe is going to do that. It was kind of like, we got your back, but give us a long term agreement and we’ll do it.

The irony of it is that you have a crisis going on in Europe. There was a dragon moment of do whatever right, anything.

TN: Sorry, Tracy. What’s that?

TS: Self imposed crisis? Their energy crisis is literally self imposed.

TN: Yeah. Okay.

AM: There’s no question that is self imposed. The European Union’s leadership has been atrocious. I mean, they’ve had the worst energy policy you could possibly think of that hampers their economic engine for the last two, three decades. I mean, you can just throw a dart at the board and pick whatever policy they’ve come up with. It has been an absolute disaster.

TN: Why is that? Why are they making such stupid well.

AM: They’ve made such a big swing to the left, the leftist voters, and they’re just climate Nazis. They won’t even discuss nuclear.

SR: We’re literally talking.

AM: They won’t even discuss nuclear power, which is absurd. They’re like, what if something goes bad like Fukushima? Oh, yeah. What if a dam breaks? Or what if a coal plant blows up? Or, God forbid, what if 10,000 Germans freeze to death because you don’t have gas stored because you didn’t have any proper management? I mean, they’re really bad at managing what’s going on without the United States holding their hand and directing what to do.

TN: Well said. Fantastic. Okay, so since we focus a little bit on energy there, Tracy, let’s swing to talk about crude and the dollar. So, our friend Josh Young posted something about kind of energy could potentially outperform this sort of stuff and really kind of looking back to the 1970s.

So it really looked like we were heading there until this week, and then we saw things really come down this week, in terms of, say, WTI, natural gas, other things. What’s going on there?

TS: I think it depends on what you’re looking at. If you were looking at frontline crude oil price, that’s one thing where a lot of speculators are involved in. If you’re looking at the spreads, it’s you’re looking at the crack spreads that are still exploding. If you’re looking at calendar spreads that are up again this week, that pretty much tells you that we put a floor under front month crude price, regardless of who is involved in what specs are involved in the industry right now. Because the spreads are really what I consider will tell you really where things are going. Right.

So we kind of have a floor night. Yes, oil had a bad week. We saw a lot of selling on downtime in markets and things of that nature. I don’t think that doesn’t change the overall fundamentals of the market. Right? I mean, we’re still fundamentally structurally undersupplied.

TN: So I’m going to ask a really dumb question here. I’m sorry if I may hear it.

SR: But we know.

TN: So are we seeing a short term sell off? Is it politically driven so that when Americans get together on July 4, they can say, gosh, gas is really down this week, and then you have a three day weekend where people are talking about that and then it rocket ships up after the fourth?

TS: Well, I think it’s a combination of most things. I think this week recession scares, we’re really the big driver for that market because everybody’s thinking we’re going to have a recession.

SR: That and the potential of having an export ban.

TS: Right.

TN: Recession, export ban, and July 4th.

TS: An export ban. That said, and I kind of tweeted this out, having an export ban, especially a fuel export ban, would make things obviously worse.

First of all, it’ll raise prices for the EU prices abroad, which after all of this with Ukraine, do we really want to hurt the EU that much? Because we supply them with one to 1.3, 1.5 million barrels per day of diesel, which they are having a huge problem. So really, are we going to abandon the you at this point? Also…

TN: My Texas friends would love to have more diesel to power their ram trucks.

TS: But the thing is that what happens is the fuel flows get so disrupted is that we’re going to have to see refineries cut run significantly in the US. Which is going to ultimately raise prices. We may see deepen prices initially, but you’re going to see higher prices ultimately.

SR: I’ll push back on that because you have a lot of storage, but you didn’t have a lot of storage before. So you don’t have to cut back on runs. You can put into storage at a pretty profitable rate because of forward selling basically all of your inventory right now. I would push back on you have to cut runs at this point.

TS: And I’m going to push back on that. We have to look at the east coast. Right. And so that’s looking at gasoline runs to make a barrel. Diesel requires a lot more oil than it does say to make gasoline. And so if we see a diesel problem, we’re going to have to cut back on this runs. I think it depends on what coast you’re looking at and what area you’re looking at.

TN: All we care about is Texas and Florida. Right.

SR: You have a lot of places to store gasoline. I mean, it’s not like we have an oversupply gasoline at the moment.

TN: It’s true. Our bob’s down this week too, right. So it’s tight.

AM: It’s interesting, Tony, it’s funny. One thing that you said July 4 and one thing that Tracy said, thinly traded is that hilariously every time we need a rally in the market during the thinly traded holiday hours, crude goes down, dollar goes down and the market goes up almost by magic on the thinly traded holiday hours. Something you should watch.

SR: University of Michigan. Come on.

TN: It’s a big driver. University of Michigan. Okay, so let’s move on. You mentioned the dollar, Albert, and so if we look at the dollar, obviously it’s near highs for the decade and that’s great if you’re in the US buying dollar denominated commodities. But elsewhere in the world it’s really hard. Right. So where do you expect the dollar to go? I can’t remember what you’ve said your expected target is. Possibly? 110. Possibly 120. So if it hits 120, Japanese Yen is at what, like 160? 170? something like that?

AM: 163,164? My calculation… This is something Yellen has done in 2012. It’s nothing new. She’s driven the dollar up. She’s out into Europe talking that she’s going to take the dollar up to 110. So this is nothing new. Everyone knows what’s going to happen. Everyone’s watching it. So we’re at 104 something today, just sitting there and hasn’t really done anything. Last day or so. Another 5% up is not a big deal for the dollar.

TN: So you see Yellen driving a stronger dollar. Sam, what do you see?

SR: I would say that I hate taking the other side. I’m going to take the other side.

TN: Great.

SR: I’m going to say that Yellen’s ability to control the dollar is de minimis at this point, mostly because the Fed is tapped out. But you already had a 4% terminal rate for Fed funds priced in two weeks ago. Today you’re sitting at basically 3.65%. So you’ve got the peak, in my opinion, priced in for the FOMC hiking cycle and now you’re on the other side of that. So I would say JPY, you’re probably looking at above 10.

TN: Oh, wow, okay, great.

SR: And you’re probably looking at a Euro at 108. 109. And it doesn’t really matter if they go into a recession because they’re… Right. The US is going to back off in incremental steps the long end of the hiking cycle and…

TN: Perfect.

SR: The dollar prices is long end of the hiking cycle and Yellen can do a lot of things. What she can’t do is increase the internal rate.

TN: That’s great.

AM: The thing is, the treasury sets USD policy, so she can certainly drive it up. I don’t know how much ammo she has left because it’s gone up. But we’ll see.

TN: Okay, perfect. That’s great. So we’ve covered almost everything in that survey and almost everything was wrong.

SR: I told you everything was I would take the other side of every single one of those.

TN: Perfect. Okay, let’s talk about the week ahead. We have month end and quarter end coming next week, right? So what does that mean for the week ahead? Everyone else.

TS: Can I go?

TN: Yes, you go Tracy.

TS: I don’t know. What I’m looking at for the week ahead is the last week of the month. Of the month and the quarter. Right. So we have roughly about $100 billion of US equities that need to be purchased over the next five trading sessions. We have a rebalance in the RTY. So we should see a lot of inflows, roughly 5.98 point billion of inflows into the US equity markets just because of the rebalance factor.

We should probably see outflows in the bond market and then that’s walking into a backdrop of negative dealer gamma. So we have the potential of a shot higher in the market.

TN: Sam? Sam?

SR: Yeah. I would say everything Tracy said in terms of the risk seems to be to the upside. I would also say it looks pretty scary when you walk into the end of the month in terms of the way the dollar chart looks right now.

You walk into the end of the month with a dollar chart looking like it’s ready, looking ready to gap down, and you have oil where it’s at. You could have a very interesting quarter end in terms of risk assets. You have a weaker dollar. You have a big buy on SPY, RTX, et cetera, or SPX, not SPY. You begin to put those pieces together and you begin to have a pretty risk on into the quarter that could be very interesting very quickly.

You get any positive headlines out of China in terms of lockdowns, you get any positive headlines out of Ukraine in terms of ceasefires, whatever BS they want to leak. Then all of a sudden you’re more upside. So I would say skewed to the upside through the beginning of July.

TN: Sam, you’re optimistic today. That’s amazing.

SR: I know. And contrarian.

TN: Optimistic and contrarian. I love it. Okay.

AM: Yeah, I mean, I agree mostly with Sam. I think just because the market is so thinly traded, the dollar should be chopping around probably on the downside a little bit, just for the week up until July 4 weekend, so long as the Europeans don’t come out and start saying any more Lehman things, Lehman crash things and all of a sudden dollar shoots up just because of fear factor out of the European side. But I don’t think that’s going to materialize over the next week, probably next couple of weeks.

After that, I think 30 days, we’re starting to look at possibly something that happened in the European Union. But for the week ahead.

TN: Fantastic. So the past three days carries into the next week. Fantastic.

AM: Yeah.

TN: Okay, guys, thank you very much. Thanks for your time. Thanks for all the stuff you passed along, and have a great week ahead. Thank you.

AM: All right, thanks.

TS, SR: Thank you.

Categories
News Articles

CNA: What does the 75bps mean to the US economy and Fed’s credibility?

Tony Nash joins Channel News Asia and discussed the possible 75 basis point hike by the Fed and what does that mean for the US economy and for the Fed’s credibility?

The full episode was posted at https://www.channelnewsasia.com. It may be removed after a few weeks. This video segment is owned by CNA. 

Show Notes

CNA: Welcome back. The world’s largest cryptocurrency Bitcoin continues its downward spiral. For the 8th straight day, it briefly fell below $21,000 and is currently hovering around its December lows. Other digital coins are also sharply lower in that sell-off as investors continue to rotate out of risky assets due to the economic headwinds. Bitcoin started the week with a 15% drop, with Ethereum very even worse. And overall the total crypto market cap shrink to below $1 trillion for the first time since 2021. That’s from a $3 trillion peak in November. Now adding to crypto’s litany of pain, Coinbase has announced it will cut nearly a fifth of its workforce, or about 1000 employees, by the end of the second quarter. CEO Brian Armstrong said the company needs to manage high employee costs in an uncertain market, warning of a looming recession and another crypto winter in the months ahead. He also conceded that the company grew too quickly. Inflation pressures continue to mount in the United States. The annual Producer price index rose ten 8% in May, staying near its record high of 11.5% in March. The data is significant as prices at the wholesale level feed through consumer prices, which are running at their highest level since December 1981.

Now the focus shifts to the Federal Reserve as it kicks off its two-day policy meeting. The Fed is set to hand down its latest decision tomorrow morning. With a 75 basis point move on the table. Investors on Wall Street are now waiting to see what the US central bank will do. Stock seesaw throughout the session. Ahead of that said meeting, it hit a session lows during the final hour of trade, with both the now and the SAP 500 losing ground. The Nasdaq posted a small gain as equities closed. Mixed, we saw the yield on US treasuries continue to surge. The anticipation of an aggressive move from the Fed saw the yields on the US two-year rise and the benchmark ten-year rise higher again. For more on this, we’re joined by Tony Nash, he’s founder and CEO of Complete Intelligence, joining us from Houston, Texas. Thanks for your time today, Tony. Now 75 basis points of the hike are on the table. What does that mean for the US economy, if indeed that is what we get from the Federal Reserve?

TN: Right? It means they’re really trying to pull back inflation. I think they’re trying to kill demand so that the supply side issues in inflation are calmed a bit. Whether they hike 50 or 75 or 100 is less of an issue than the fact that it’s really hard for them to control the supply side inflation that we’re seeing right now with petrol and with oil and with food and other things. So what’s happening right now that’s really problematic is Americans for the past two months, if you look at consumer credit, it’s really risen dramatically over the past two months. And that’s when a lot of the petrol prices have really spiked. So people don’t have the spare capacity in their monthly savings to pay for higher prices for petrol and food and other things. So consumer credit is racking up really quickly.

CNA: Yeah. And does that mean, Tony, that the strength of the consumers in the US will start to inch lower because for a while it was really the consumer spending that was trying to keep the economy going?

TN: Yeah, absolutely. And as that says, consumer credit capacity is limited. You’re right. If interest rates rise, it makes it harder for those people to pay them off. Right. So that credit capacity can’t be paid down. And economic growth, consumer-driven economic growth later in the year is hard to see take off. So this summer, people are paying more in the US for gasoline and flights and really people want to take a vacation no matter what. But I think we’re really going to see some pressure on consumers in, say, September, or October. So if they hike 75 at this meeting, it just means that in two, three, six months, as they accumulate, the future Federate rises in July and September and November, it means that the cost of credit six months out is going to be dramatically higher.

CNA: Before this week, Tony, it was 50 basis points. That was what was expected after the inflation data that we got last week. All of a sudden we’re getting expectations of higher interest rate rises. Does it surprise you that it seems like the US Central Bank keeps getting surprised, but how inflation is ticking higher and it’s not turning the corner as some had expected? And what does this mean for their credibility?

TN: Yeah, it’s a good question. Am I surprised that they’re surprised? I’m shocked that they’re surprised. Right. And I think what it does is it creates, as you say, a credibility issue both for the Fed and for the US administration. So the US administration isn’t putting the right policies in place to help the supply side inflation issues at refineries with crude oil, the food and so on and so forth. But the Fed is late. The Fed should have started hiking months before they did. So many people have said this, but the Fed is late. And now they’re having to catch up super quickly and it’s going to hurt people on hourly wage jobs and in kind of the lower middle class, those are the people who are the most constrained and those are the people who are going to hurt the most.

CNA: Yes, they’re trying to play catch up. But does this force the hand of the US Central Bank to actually push through with a 75 basis point hike when that’s pretty much what most people are expecting?

TN: Yeah, well, a lot of the banks over the past couple of days have started to expect 75. Some are still at 50. I wouldn’t be surprised if they stayed with 50 if we saw that we would see markets rally going into the weekend, which might be a nice sentiment break for people. If they raise 75, then markets are still going to be very difficult and very choppy going into the weekend. So it really all depends on the decision tomorrow. But I think it also makes things more difficult in Asia and other markets. If they continue to hike, then the dollar grinds higher and it makes things like oil and other commodities that much more expensive as those dollar-denominated commodities become more and more expensive, expensive for.

CNA: Everyone around the world and that would just exacerbate the inflation pressures that we are seeing right now. Thanks so much for your insights, Tony. Tony Nash, there founder and CEO of Complete Intelligence.

Categories
Podcasts

Business and Market Discussion

This podcast was originally published in https://www.rthk.hk/radio/radio3/programme/money_talk/episode/810164.

Surging energy and food prices in the United States have sent inflation to a 40-year high. Consumer prices rose 8.5% in March, the fastest annual gain since December 1981. The monthly rise was 1.2%, the fastest jump since September 2005 and a sharp acceleration from February’s 0.8% increase. 

Russian President Vladimir Putin says peace talks with Ukraine have reached a “dead-end” and he accused Ukraine of deviating from agreements reached in Turkey. He said Russia’s “military operation” will continue, blaming Ukraine for “inconsistency in key issues” from talks and “fake claims” about war crimes.

The World Trade Organisation said that global trade could be cut almost in half and is expected to grow by 2.4% – 3% in 2022, lower than its previous estimate of 4.7% in October due to the ongoing conflict between Russia and Ukraine. The WTO said the war could lower global GDP growth by 0.7-1.3 percentage points to somewhere between 3.1% and 3.7%. 

Sri Lanka said yesterday it will temporarily default on its foreign debts amid its worst economic crisis in over 70 years. The country was due to pay a US$1bn international sovereign bond in July, part of a total of US$7bn of debt payments due this year. Sri Lanka’s foreign reserves stood at US$1.93bn at the end of March. 

Shanghai saw a drop in new Covid cases on Tuesday after ten straight days of record highs. The financial hub reported 23,342 new local cases for the day, compared with just over 26,000 the day before. However, it was being reported on Tuesday that authorities were backing away from lifting restrictions in several thousand low-risk areas. Residents can move around within their compounds but are still barred from venturing out onto the streets if their surroundings belong to higher-risk areas. Officials ordered another round of mass testing, at least the seventh in 10 days, in the highest lockdown zones. 

On today’s Money Talk we’re joined by Dickie Wong from Kingston Securities, Carlos Casanova of UBP and Tony Nash, Founder & CEO & Chief Economist at Complete Intelligence.

Show Notes

PL: This is Radio Three Money Talk. Good morning. It’s eight in Hong Kong. Welcome to Money Talk on Radio Three. From me, Peter Lewis. Here are the top business and finance headlines for Wednesday, 13 April. Surging energy and food prices in the United States have sent inflation to a 40 year high. Consumer prices rose 8.5% in March, the fastest annual gain since December 1981. The monthly rise was 1.2%, the fastest jump since September 2005 and a sharp acceleration from February’s zero 8% increase. Russian President Vladimir Putin says peace talks with Ukraine have reached a dead end, and he accused Ukraine of deviating from agreements reached in talks in Turkey. He said Russia’s military operation will continue, blaming Ukraine for inconsistency in key issues and fake claims about war crimes. The World Trade Organization said that global trade could be cut almost in half and is expected to grow by 2.4% to 3% in 2022, lower than its previous estimate of 4.7% in October due to the ongoing conflict between Russia and Ukraine. Wto said the war could lower global GDP growth by zero 7% to 1.3 percentage points. Sri Lanka said yesterday will temporarily default on its foreign debts amid its worst economic crisis in over 70 years.

The country was due to pay a $1 billion international sovereign bond in July, part of a total of $7 billion of debt payments due this year. Sri Lanka’s foreign reserves stood at just under 2 billion at the end of March, and Shanghai saw a drop in new covert cases on Thursday after ten straight days of record highs. The financial Hub reported 23,342 new local cases for the day, compared with just over 26,000 the day before. However, it was being reported yesterday that authorities are backing away from lifting restrictions in several thousand low risk areas. On today’s Money Talk, we’re joined by Dicky Wong from Kingston Securities, Carlos Casanova of UBP, and Tony Nash, founder and CEO at Complete Intelligence. The moderation in core CPI initially prompted a rally in stocks on Wall Street and sent US Treasuries higher. But stocks then gave up their gains as the session wore on, with the S Amp P 500 and Nasdaq falling for a third day. The S Amp P 500, which was up 1.3% at the high of the day, closed a third of a percent lower at 4397. The Dow relinquished a gain of over 360 points to close 88 points lower at 34,220, and as the composite index, which was up 2%, declined zero 3%, ending at 13,372.

In Europe, the regional Stock 600 index fell a third of a percent. Deutsche bank and Commerce Bank led losses for the index, with both falling more than 8% after an undisclosed shareholder unloaded roughly 5% stakes in both German banks. London’s footsy 100 dropped null. .6% and it was a volatile day for mainland China and Hong Kong stocks, which opened higher before plunging late morning and then staging a drastic rebound in the afternoon session with reports that the China National team was actively supporting the market. The rebound came amid calls from China’s market regulator that firms buy back shares and ask major shareholders to support stock prices amid a sluggish stock market. The Hangsting index had slipped half a percent by lunchtime to a four week low before rebounding to close 111 points, or half a percent higher at 21,319. Tech index was up two and a half percent in the morning session before dropping zero 8% at lunchtime and then rebounding to close 1.4% higher. The Shanghai Composite recovered from losses of 0.8% to close one and a half percent higher at 3213. $0.10 advanced 3.6% added 4.2% after China approved new online gaming titles for the first time since July.

In the commodities markets, brewing crude oil rose almost 6% to $104.87 a bowel. Gold is up close to 1% at $1,966 an ounce. The yield on the benchmark ten year treasury notes fell five basis points to two point 73% after hitting two point 83% early in the session. And in the currency markets, the US dollar is stronger this morning. The Euro is trading at $1.08 and a quarter cents. The Bucks at 125.5 Japanese yen Sterling is worth one point $0.30 and Hk$10.19, and the Chinese yuan is at six point 38, versus the dollar in offshore markets. Bitcoin this morning is about 1% firmer at $40,100. Around Asian stock markets this morning. In Australia, the SX 200 up about zero. 1%. Stocks in Japan have now opened the nicate 225, about three quarters of a percent higher. The Cosby in South Korea is half a percent higher, but futures markets pointing to a loss of about 70 points for the Hang Sein at the open this morning. Fine. Let’s welcome our guests. We have with us Dicky Wong, head of research at Kingston Security this morning, Dickie

DW: Good morning, Peter. How are you?

PL: I’m well, thank you. And also with us, Carlos Cassanova, senior Asia economist at UBP. Morning to you, Carlos.

CC: Good morning, Peter.

PL: And over in Texas, in the USA, we have Tony Nash, founder and CEO and chief economist at Complete Intelligence. Thanks for joining us again, Tony.

TN: Thank you, Peter.

PL: Let’s start in the US with those inflation numbers. Surging energy and food prices in the United States have sent inflation to 40 year high. Consumer prices rose eight and a half percent last month. That’s the fastest annual gain since December 1 981. The monthly rise was 1.2%, the fastest gain since September 2005. Excluding food and energy, core CPI increased 6.5% on an annualized basis in line with expectations, core inflation rose zero. 3% for the month energy prices, they were up 32% year on year food prices, they jumped 8.8%. And shelter costs, which make up about a third of the CPI, rose by 5%. Tony, you’re over there in the US, so let’s start with you. It’s hard to find very much good news in this data. But who do workers blame for this?

TN: I think a lot of Americans really do see inflation rising as Joe Biden has been in office. It’s accelerated during his tenure. So whether it’s his fault or not, he’s sitting in the seat while it’s happening. There is a lot of resource from the White House going into saying that this is Putin’s inflation responsibility, claiming that inflation didn’t really accelerate until the war started. But again, if we look back to the rapid acceleration of inflation, it really started, I guess you could say maybe October. But we’ve been at this for a year or so. I think Americans working level, Americans, whether they’re working class, blue collarly workers, they’re obviously the hardest hit by this. And for workers at those levels, it’s really looking at the political issues, not something that’s happening on the other side of the world.

PL: So what can Joe Biden do to try and bring inflation under control? What are people expecting to do?

TN: Well, I think one of the really easy things that he could do, which I’m in Texas. So this is a very biased view, but since Joe Biden has come to office, he’s put a lot of restriction on the drilling and transport of oil and gas. And so there could be a lot of alleviation of energy prices if the White House would remove the regulations that they put in place on the drilling and transport of oil and gas. The White House also killed a pipeline of Canadian crew or a pipeline from Canada that would transport heavy crude to American refineries, which is what’s needed for petrol or gasoline here. And Americans actually don’t necessarily use the light sweet crude that’s refined or drilled, say in Texas. They use the heavy sour crew that say from Canada and from Venezuela. So the pipeline from Canada would have been very helpful to keep prices stable in the US, energy prices stable in the US, but that was killed literally on the first day of the Biden administration.

PL: Vicki, what is the impact for markets and particularly out here, US markets? They rallied initially because they took some optimism for the fact that the core CPI had declined slightly from last month, but they lost those gains. How do you think markets are going to respond to this?

DW: Well, in terms of inflation, I guess it’s an overall problem not only in US but basically everywhere else, also in China. And you may say, like Russia invasion of Ukraine intensified the situation of inflation in US, but inflation is already there. It’s already a problem in US. So in terms of the market expectation, I would expect first of all will probably have another rate cut for even 50 basis points in May and continue to high interest rate until the year end. At the year end, maybe the sets and target rates will be like two point 75 even at this really high level compared to one year ago. So in terms of the year car still going on, keep going up there’s no question ask but already probably the market already digest this kind of situation like you asked me have to continue to high interest rate. But in terms of in mainland China is another thing. Even though China official CPI rose by 1.5% in March, still below US CPI or everywhere else in Europe. So expecting that PVoC may have some kind of room to have an outer round of rate card or triple archives.

But in terms of the situation now in mainland China it’s pretty dilemma because if they really want to have another round of fresh cut of interest rate or even triple R may intensify the situation now because the ten year value of the US Treasury is slightly higher than the same period treasury in mainland China. Now it may be some kind of money outflow from mainland.

PL: Is the window of opportunity for the PPO to go and cut rates? Is it closing the worst this inflation data gets? It doesn’t leave them much opportunity, does it?

DW: Exactly. So I don’t really expect a rate cut in the near term but maybe I expect Arrr cut instead of a rate cut because rate cut create a high pressure of capital outflow. We have already seen in March no matter in the bond market, also in the Asia market from the stock connect. So people actually getting money out from mainland China. So this is also another reason why recently the Asian market underperformed even the US market because the capital outflow. So it’s not a good timing for China but then you still have to think about it, what they can do because capital outflow and intensified the situation in Russia and Ukraine. So also create another round serious pressure. The CPI future growth is mainland June.

PL: Let me bring Carlos in. Carlos, this is not an easy situation for central banks to deal with, is it’s? Because this is not demand led, this is a supply shock, correct?

CC: I think what we saw in the market this week was some investors pricing in the probability that inflation was peaking within the next few months. We think it’s a little bit early to say we are expecting around eight to 9% inflation in the US in the coming months and of course then a gradual descent, but it will nonetheless remain significantly higher than expected in 2022. And as Tony was mentioning, this will be front and center with Biden facing elections in the fall. So I do think that central banks around the world are going to be very focused in trying to address the demand side factors or drivers of inflation even as they have very little control over the supply side factors. And on that note, just keep in mind that we have this conflict in Ukraine that’s leading to supply chain disruptions. But we are already seeing disruptions to global shipments through the Port of Shanghai following from the lockdown there. So it is likely that these supply factors will continue to exert pressures in the coming months. So in my opinion, I think central banks will unfortunately remain in this very hawkish trajectory even though they don’t have 100% control.

PL: And what does the PPOC do? That’s probably the one major central bank in the world that would like to ease monetary policy to cope with the slowdown there on the mainland. It’s in a difficult position as well, isn’t it?

CC: Ppoc is in a very difficult position because we’ve seen authorities voice their concerns about the lack of easing quite a few times since the middle of March, and yet PPOC has an east the risk of outflows is real. We saw that China’s premium over the US in terms of its ten year yield is completely gone. So any form of eating will exacerbate potential capital risks. But you have inflation creeping up potentially above the 3% target set by the beginning of the year. So the conditions could turn less accommodative very quickly. So PPO has a narrow window of opportunity in my opinion to deliver stimulus and a triple our card won’t be enough given what is happening in Shanghai, given that we have -40% sales in the housing sector and that accounts for a third of the economy is not going to be enough to get us from where we are now to 5.5% growth by the end of the year. So unfortunately, they should be doing a rate cut even if that exacerbates capital outflows and even if the impact of a rate cut might be more muted as most people remain in some form of lockdown.

So it’s less easy to go out and spend money. I think that is something that PVC has been discussing, but it doesn’t matter. They need all hands on deck in order to reach the fact growth target by the end of the year and really running out of time given that inflation is rising.

PL: Tony, you mentioned energy prices, but of course, food prices are also jumping as well. They were up 8.8% over the period. We’re seeing global trade slow quite dramatically now. And the UN saying that the war in Ukraine is causing a huge leap in food prices. The UN food prices index is at a record high. It was up 13% in March are on consumers feeling that as well. Over in the United States, this rise in food prices?

TN: Yeah, for sure. Americans are feeling the rise in food prices. I think, however, the most acute food price rises will be in places like Lebanon and Egypt and other places that are more directly affected by the Ukraine and Russia war. Here in the US, we do have pressure on wheat and corn prices, corn prices or maize prices. There’s upward pressure on those prices partly because the White House just said they want to add corn to fuel here to in their minds, reduce fuel prices. So there’s pressure on corn both to feed people and for fuel now and of course, with proteins, those prices are up as well double digits. So Americans are feeling it really all around, but not as acutely as some of the people in Europe and the Middle East will as the pressures from, say, Ukrainian and Russian exports hit those markets.

PL: We’ve already had an energy shock in many parts of the world. Do you think we’re heading for a food crisis that we’re going to see shortages, we’re going to see prices soaring, and maybe, as unfortunately always happens in this case, it affects the poorest parts of the world the most?

TN: Yes, it does. And sadly, I think that is the case because places like Ukraine and Russia do provide so much mostly Ukraine provide so much weed and maize and cooking oil to some of these markets. So, yes, I definitely think that that is.

PL: Our Americans questioning President Biden’s support for Ukraine. When you start to see the costs of this mounting. They’ve banned American. They banned Russian oil and gas imports. That’s helping fuel price rises. They’re seeing the price rises in food. Are they starting to question whether or not the US is on the right track supporting Ukraine?

TN: I don’t know. I know that a number of Americans have questioned it from the start, not that they don’t support Ukraine, but Americans are worried about being directly involved, meaning sending troops to Ukraine. I think Americans generally are comfortable sending weapons and supporting with that aid, but not necessarily with the troops.

PL: Okay, Dickie, let’s talk about the lockdowns up on the mainland. There was a slight decrease in COVID cases yesterday, but we’ve had ten days now of record cases in Shanghai. Guangdong, Guangzhou has gone into a partial lockdown as well. Now, what sort of impact is this having on the economy?

DW: Well, that’s so obvious. The big lockdown in Shanghai may give some kind of pressure to not only the first quarter GDP, but indeed the 5.5% annual gain of the GDP. It’s probably not that easy to achieve. So I do see some kind of civil linings because China’s government recently added some of the approval of the online and cellphone gaming. And also when we talk about the first quarter lending also hits record to 1.3 trillion before PVC take any action in the first quarter because last year PPOC cut LPR rate triple R, but not this quarter. So I would expect definitely I do agree that PPOC has to take some kind of action like seriously to treat the problem, especially the lockdown in Shanghai. And 5.5% is not something easy. So they have to no matter fiscal policy, monetary policy, and et cetera regulations has to be used, especially some of the tech companies.

PL: Let me ask you also because I want to ask you about the markets as well. We’re seeing a lot of calls now from Premier Leakage, the State Council to take steps to support the economy and also from the regulators now to support the market the China Securities Regulatory Commission wants shareholders to buy back stock. It wants Social Security funds, pension funds, trusts, insurance companies to increase their investment in the markets. What are your thoughts on this? Isn’t this the regulator going way over their skis here? It’s not the job of the regulator, is it to tell companies to buy back more shares and to put public money into the stock market? Surely this is way, way beyond what the regulator should be doing.

DW: Well but in terms of the mainland market, the HR market, this is probably the regulator will regularly do I know they do it but it’s wrong isn’t it wrong that the regulator should do that?

PL: It’s sort of almost an outrageous abuse, isn’t it? The regulator should be there to make sure the market operates fairly and efficiently to crack down on abuses but not do this?

DW: You may say so but the regulator to mainland because you can see intensifying the tension between China and US never gone and also like recently no recently just yesterday the holding foreign companies accountable action called Hscaa a fresh round of addiction of a lot of Chinese companies like more than twelve companies this is the fourth round already it gives some kind of pressure to the ADR market yesterday in US and definitely some of the ADR may open slightly lower today although the pressure may not be as high as the previous one or the first round of the addiction of the Hscaa but because of the tension of these two countries China may have to do their own thing so in terms of like Green Valley always comment about the stock market and try to interfere with the stock market I will not say good or bad but at least it would be some kind of support to the local Hong Kong stock market so I believe we find support at 21,000 because investors may expect or they will expect like PPOC will take action very soon so it may help to stabilize the overall sentiment in Hong Kong as well as in Asia Carlos.

PL: We’Ve heard Premier Leakage now has issued his third warning about economic growth in under a week what can they do?

CC: Well, we do expect to see weaker growth in March, April and May so those will be the three weakest months I think that in addition to doing more monetary policy and fiscal policy support the big question Mark is will they announce some easing of restrictions or at least provide some degree of regulatory clarity for global investors? On the housing and also tech front there’s a whole debate around this. Recent regulations surrounding dual circulation in China points to some additional regulatory headwinds for some of these companies but I think that the issue is not so much regulation it’s more the lack of visibility so they are likely going to at least provide that in the coming weeks. And of course, if this contraction is bigger than expected in the first half, and I did use the word contraction because I do think that GDP has a chance of actually declining in Q two, then the measure of last resort in order to achieve that growth target would be to effectively inflate the housing sector again in Q four. But we should be back to square one. So I think they will try as much as possible to use more Australian and other channels to try to prop up the economy so that growth doesn’t follow the cliff.

But they are running out of time and we do hope that they will announce something big in April.

PL: Okay, Tony, final word to you. I know all sorts of things go on on the mainland that perhaps wouldn’t go on elsewhere, but when you see the regulator trying to arm twist companies into buying back their own stock and get public funds to get the market back up, what do you make of that, Peter?

TN: It reminds me of June of 2015, if you remember, when markets on the mainland really fell pretty hard. There is pressure domestically in China for people to buy shares for a patriotic reason. Even within the Chinese bureaucracy. There was pressure for Chinese bureaucrats to buy shares. So I think they’re just doing it out loud now and they’re doing it for the companies themselves. But to me, when I first saw this news, it really was an Echo of June of 2015 when markets fell and there was real pressure on Chinese retail investors to buy the dips and to support the market. And a lot of them lost. I knew people there who lost 2030, 40% of their wealth because they were buying patriotically.

PL: Yeah. Okay. Well, that’s a fair warning. Thanks very much. That’s Tony Nash, founder and CEO and chief economist at Complete Intelligence. Dickie Wong, head of research at Kingston Securities, Carlos Casanova, senior Asia economist at UBP. You’re listening to Money Talk on RTHK Radio Three. Let’s take a final look at the markets for today. In Australia, the SX 200 up zero 2%, the Nico two five in Japan rallying as well, up zero 8%. The Cosby is up. A third of the cent in South Korea does look like, though the hangsting is going to fall slightly, about 50 points or so at the Open later on this morning. Thank you very much for listening this morning. Please join me again for the final time this week in a holiday shortened week at 08:00 tomorrow. Stay tuned for covered updates after the news with Jim Gold and Anna Fenton. The weather forecast, mainly cloudy, few showers going to be hot with sunny intervals during the day. Maximum temperature of 29 degrees, mainly fine and hot during the day tomorrow. And on Friday, the temperature right now 25 degrees, 82%. Relative humidity 32 here’s Andy Shawski with the half hour news.

AS: Thank you, Peter. The head of the Government’s policy innovation and coordination office says the authorities have expanded it’s $10,000 subsidy for people who have recently lost their jobs Due to covet. Officials say they have received 470,000 applications for the subsidy. In February. They expected only 300,000 Would apply. Doris Hoe said that’s because more people have lost their jobs.

DH: This is partly because more people were out of employment in March When the unemployment situation was in February and partly because we expanded our scheme subsequently to cover employees working in closed app premises such as affinity centers and beauty salons and who were forced out of work about their employers.

AS: Medical Association President Choi keen says the government initiative giving private doctors access to oralcobid drugs will definitely be effective in preventing severe cobalt infections. Authorities on Monday said that private doctors could request antivirals through a dedicated electronic platform. Doctor choice said this is a sensible arrangement.

DH: The patients usually see the GP first before they go to the emergency Department before they get very ill, so it’s the first stage that the antivirus are infected. So if they are seen at the first stage and given the medication, they will not proceed to a very ill stage so it is effective and useful.

AS: Police in New York are searching for a man who shot ten people at a Brooklyn subway station during the morning rush hour. Six others were also hurt, Mostly through smoke inhalation. None of the injuries are life threatening. The New York city police Commissioner, Ketchen Sewell, gave details of the incident just before 824 this morning.

KS: As a Manhattan bound and train waited to enter the 36th street station, an individual on that train donned what appeared to be a gas mask. He then took a canister out of his bag and opened it. The train at that time began to fill with smoke. He then opened fire, Striking multiple people on the subway and in the platform. He is being reported as a male black, approximately 5ft five inches tall with a heavy build.

AS: The city of Guangzhou has reported 13 new COVID cases. Health officials in the city say the new infections were linked to previous cases, but they warned that transmissions might have been taking place for some time before the new cases were found. And the next few days will be critical. To contain the outbreak, local authorities have been conducting mass testing to screen out patients primary and secondary schools of suspended face to face class.

Categories
QuickHit

The year ahead: What have we learned from 2021? (Part 1)


Patrick Perret-Green of PPG Macro joins us for a QuickHit episode to reflect what 2022 brings. Patrick got not only the Covid call, but a lot of inflation calls right through the pandemic. As we wrap up 2021, what does he think about right now and how does that set the stage for his view on 2022?

PPG started in 1997 in research where he learned how bank balance sheets work. He also run the strategy for Citi for rates and effects in Asia and at one point worked out in Sydney. And in the past five years now, he’s been focused on the global macro environment.

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This QuickHit episode was recorded on December 16, 2021.

The views and opinions expressed in this The year ahead: What have we learned from 2021? (Part 1) Quickhit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

TN: So, Patrick, you’ve got not only the Covid call, you’ve gotten a lot of inflation calls right through the pandemic. And as we wrap up 2021, I guess what I’d really like is, what are you thinking about right now and then how does that set the stage for your view on 2022?

PPG: Well, there’s a whole lot of multiple issues. So I was rewatching Powell’s Q&A this morning. And clearly there is the energy side of things. There is the good side of things, the demand for goods, and they are responsible for big chunks. And I was quite surprised by the ECB’s massive upward revision for inflation for 2022 in the press conference earlier on today. But base effects are very powerful. So we always knew we were going to get peak base effects. We’re going to come in around October, November time. Oil average WTI average below about 39 to $40 last October, November. And by January are up to, or early February, we were early 60s. That base effect will tumble out quite dramatically.

I also think that the durable goods effect is also going to tumble out dramatically. We’ve had record purchases, but I remember talking joking with people last year. It was about the middle of last year, and I was saying I was just as an experiment going on ebay and seeing what I could pick a Peloton up for. So everyone got their Peloton or they bought a flat screen TV. They did the house, they did the kitchen because everyone was at home.

And I think when you look at durable goods purchases in the US and this is chart I’ve posted many times on Twitter. They are off the charts and they’re off the charts relative to disposable income as well, which is now falling. Okay, due to inflation as well. But in the US, we’ve also got this remarkable thing that it’s very different to other countries.

So you look at the UK. We had the employees taken out the other day. We’ve now got more people on payrolls than we had prepandemic. Non-farm payrolls are still down 3.9%. And in Europe employment has been much better. So the great retirement, the great resignation seems to be a US phenomenon.

But I think next year the risks are that everyone that goods purchases collapse and pricing power similarly collapses with that. And even things like autos as well will pass. So we know for well that the auto manufacturers have got lots full of 95% completed cars, and the chip shortage is actually a thing. It’s not that the world has run out of chips. There’s some papers recently looking at chip supply.

So the supply chain disruptions are being true. Yes, there’s still log jams with ports in the US, but in Asia, around Singapore, they’ve largely cleared into chain. Yeah, we’ve still got subjects very pandemic risks of problems with changing over ship crews and things like that. But overall, I think that side of things will ease down.

Okay. The pandemic is of pain, but we all know that. And there’s a lot of we’ve got Omicron now, but there is some cause for hope. It’s incredibly infectious. But all the people I know have got it. I don’t know anybody who’s had it really bad. Whereas I know people who even had Delta and they were really late. I don’t know anybody hospitalized, really. But could this be, like a bit of a bushfire?

It goes through very quickly. But actually, then we have the benefit because it’s so infectious. So many people get it. That herd in unity becomes higher. And actually, by February we’re back and everyone not giving a damn.

TN: Which is what I love. I love it. I love it. Let it be. So I hope it happens.

PPG: But let us go. But let’s not forget the underlying reality. People seem to stare in sort of my a rose tinted glasses and look back and think like, oh, wasn’t it wonderful prepondemic? No, it wasn’t. The world central banks weren’t cutting rates in 2019 because we were in good shape and there wasn’t a load of excess capacity. My concern is now that actually we talk about capacity being built. So records for containerships is less.

However, the volume of global trade actually is not particularly higher. It’s more because of disruptions. An empty container has been trapped in places. So people are building more containers and they’re building more factory space. But once the supply chain disruptions come down, then you’re going to be left with even more excess capacity.

TN: Right. Well, it’s the other side of letting all those old containerships and book carriers retire in kind of 2011 to 15. Right?

PPG: I’m still left with an image of a world that, compared to 2019, has more debt, it’s older and the capacity hasn’t gone away. And then we’ve also got the geopolitics and the politics and all that sort of stuff as well.

Watching Powell last night, I was struck by how amazingly sort of confidently was about the outlook for the US economy. Two, how he seemed to have lost all recollection of the effect of the last tightening cycle on what was a much healthier economy. So here we’re talking about, we got a 150 basis points of tightening by the end of 2023.

Okay, tapers. We all knew that’s going to end quickly. It’s going to be done by middle of March, in 10 weeks time.

TN: Just words, Patrick. It’s just words.

PPG: And then they do Redux. And he admitted at the end towards the end that they had their first discussion about the balance sheet. So I think they’ll start balance sheet reduction much sooner. But the problem is if we go back to last time when debt was so much lower, the Fed overtightened.

My reckoning, was they should have only really gone to one of the records. They completely underestimated the impact of balance sheet reduction on liquidity. I did quite a lot of work on the plumbing, and the irony is that the Fed is in charge of a mandatory systems. They’re not a very good plumber. They seem to actually understand how their own system works properly. So you end up being like the repo crisis. No, it’s not QE. We’re just buying bills and then we’re buying coupons. But it’s not QE it’s just liquidity management.

All these various issues and the other aspects I think about inflation is, there’s a lot of similarities with what happened with China in 2008, 2009. China had this. It was only a $7 trillion economy. A trillion dollars of stimulus. M1 was up 40%, M2 was up 30%. And rather than normal lags of six to eight, nine months, M2 growth peaked at the end of 2009 or late 2009. But inflation didn’t peak until the end of 2010, early 2011. So such was the volume of stimulus that came through. It just reverberated along. You dropped a Boulder in a pond?

TN: Sure.

PPG: So the ripples effect just last for much longer. And I think that’s one of the things we’re seeing, but obviously, what we also are seeing is global money growth as a whole has slowed very dramatically. And even when I look at things like excess reserves or where we are now or currency and circulation within the US, the sort of three to six month annualized rates are backed down to rates that they were at pre crisis.

So the year on year base effects are all fading out. And ultimately, unfortunately, most central bankers aren’t monetarists. They seem to have banned monetary economics. Greens bank scrapped M3 in the US. He’s a great scenery as far as I’m concerned.

TN: So when do you see this stuff really taking hold? Is it kind of mid 22 or?

PPG: The second quarter it really picks it. And we got the other side of it. So we got a US that’s doing okay or brilliantly, as far as pounds and the Feds… Europe, that actually is doing all right as well I mean, everyone’s got perpetual downer in Europe. But I think Europe could be the surprise next year.

And we got China, which is everyone still gets on this sugar high. They’re doing stimulus. And I keep on trying to explain to people, it’s not stimulus. This is dialysis.

TN: That’s a great statement.

PPG: I had a long term view on China, and it really goes back to sort of 2014. Once Xi really took control, got rid of all the rivals, started centralizing the power.

And there’s a long term rationale behind that. So, yes, in terms of the Chinese are great at some long term thinking. In other ways, I describe them to people as like, yeah, China is like a linebacker. He’s like 250 pounds. He’s six foot six tall, but unfortunately, he’s got the brain of an 18-year-old.

TN: I think the latter is more accurate, actually. With that in mind, as we move from inflation to say another obvious kind of what’s ahead for 22? What do you see for China in 22? Do you see ongoing stimulus? Do you see a roaring Chinese economy? What does China look like for you in 2022?

PPG: Well, the interesting one is that we look at everything that’s come out of the recent Central Economic Forum, all the going. The whole emphasis is on stability. None of this grandiose stuff about we’re going to be strong. It’s about stability.

Think tank South China Morning Post, which is owned by Alibaba, which is effectively controlled by the state nowadays. So there’s the G 40 Economic Council, whatever they are think tank. But it’s next PVoC governor or deputy governor on it as well. A big article. Nothing is said without less it’s approved.

So they were talking about monetary and fiscal stimulus next year and by that moderately lower interest rates. Central government stimulus because it can’t come from local governments because they’re bankrupt and they’re not getting the land sales revenue and they won’t because the collapse of the real estate.

TN: That’s an important point, though, if you don’t mind holding on the SCMP article for a second. I see people on social media say all the time, well, local governments will always come in with stimulus. But from where? I don’t understand this fallacy, that local governments can always come in with stimulus.

PPG: Well, no, they can’t, because I think even Goldman come out and say that local governments have got hidden debt of about 40 trillion CNY. And all their various financing vehicles. They’re screwed.

They don’t have the money. But over time over the past few years, we’ve probably seen this greater and greater central control. Come on them anyway. They’re more and more dependent on central government forward expenditure. And the rationale comes to this because I think the regime has always recognized that the debt or we’ll keep playing the game of Jenga is unsustainable.

TN: Right.

PPG: And therefore you have to get to a point where we’re going to take some pain. So if you look back at what Xi’s been talking about over the past few years, it’s all about struggle, the Long March. I mean, this is like really going in. That is the story of China. He conveniently forgets to mention, the Long March was actually really a long retreat and basically hardly anybody who started it survived. But that’s completely ignored.

But there is this centralization of power because they know that things have to be dealt with and there will be there’s a potential for trouble. So you become a super authoritarian super, you know, look at all the moves about data.

It’s all about the Chinese government having much more control, much more visibility, a greater ability to snuff out any sort of signs of opposition at the very earliest time.

TN: But my worry there is that China, actually, I think, is becoming fairly brittle. Meaning the Chinese government is becoming fairly brittle.

Under previous regimes, you had a fair bit of flexibility where you had the different levels, not with a lot of autonomy, but with a fair bit of autonomy. Now you have a huge amount of centralization and that creates a fairly brittle government, both economically and politically.

I’m not saying it’s necessarily going to break, but I do worry about what they’re creating.

PPG: Well, I agree with you. I’ve made sneak it past my then investment bank employees. When I came out 2014, I wrote about the stylinization of Chairman Xi.

So you have the centralization of power in one man. But then you also get that fear of slightly Tsar Russia. Nobody wants to be the bearer of bad news. So you had African swine fever. Everyone covered it up. Which was one of my concerns about Covid, because, like you saw in Wuhan, local police shut up the doctors on the 1 January.

And similarly, so you have this culture of paralysis, even pre crisis, Xi comes out and says, oh, we need to reduce coal fire stations. So good party figures, party Chiefs, local party Chiefs. We shut it, shut it down. And then they realize, actually, we haven’t got anything to heat the homes or schools.

Oh, by the way, then we have to divide the energy from the gas from the aluminium shelters to actually do that. You got this sort of, whereas, if you look back to China and Zheng and other leaders, China sort of thrived on its basically Brown envelope culture. We just get it done. Ignore central government. Okay, but at the same time, we are putting loads of cadmium into the ground and killing ourselves. But so be it.

TN: When you look at what’s happening in China domestically, with the economy and with the political structure. I’m also curious about their outward political projection. And I do worry about Northeast Asia, not just China, but Japan, Korea, Taiwan.

And I’m curious, since you have such a historical background, I’m curious what you think about China in terms of political projection, say for 2022. Are you worried that they are going to become aggressive in ’22?

Categories
News Articles

Benchmark repo rate drops first time since October amid cash glut, collateral shortage

This article first appeared and originally published at https://seekingalpha.com/news/3782474-benchmark-repo-rate-drops-first-time-since-october-amid-cash-glut-collateral-shortage.

  • In the wake of the financial system’s cash glut and collateral shortage from the Fed’s quantitative easing program, the Secured Overnight Financing Rate drops to 0.04% from 0.05% on Monday, the first decline since October.
  • Even with asset purchase tapering underway, “it’s largely the same set of circumstances as in October,” TD Securities Strategist Gennadiy Goldberg told Bloomberg. “Lots of cash in the system and not a lot of collateral and that’s weighing down repo.”
  • Meanwhile, U.S. commercial banks park yet another record $1.75T at the Fed’s overnight repo facility, implying the banks are drowning in excess reserves, while searching for yield – which is scarce as most of the Treasury yield curve trades in net negative territory on an inflation-adjusted basis.
  • There’s an “incredibly large amount of cash sloshing the market,” said Complete Intelligence Founder Tony Nash via Twitter.
  • In August, the Fed’s overnight repo facility took up more than $1T.
Categories
QuickHit

QuickHit Cage Match: Time to Taper?

This is a special QuickHit Cage Match edition with returning guest Albert Marko, and joining us for the very first time Andreas Steno Larsen to talk about tapering. Will the Fed taper this year? If yes, when, how, and why? If no, why not? Also discussed are the housing market, China GDP, and corporate earnings.

 

Andreas is the chief global strategist at Nordea Bank, which is mostly a Nordic bank, but has a presence in large parts of Europe, but also in the US. He speaks on behalf of the bank on topics surrounding global markets and in particular bond markets.

 

Albert Marko is a consultant for financial firms and high net worth individuals trying to navigate Washington, DC and what the Fed and Congress are up to.

 


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This QuickHit episode was recorded on August 16, 2021.

 

The views and opinions expressed in this QuickHit Cage Match: Time to Taper? QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: So Andreas, I noticed you guys, you and Albert kind of in a Twitter fight last week about tapering, and that’s what really drew me to this discussion. I wanted to give you guys a platform to talk through this. So help me understand, you know. So what is your position? Why do you think it’s going to happen? When do you think it’s going to happen?

 

ASL:  Well, I think tapering is right around the corner, and the basic reason is that I expect marked sequential improvements in the labor market in the US over the coming two or three quarters. If you look at it, very simply speaking, right now, there are more job openings than unemployed in the US. I know I disagree with Albert on this as well. But in the old world, that would at least have let the Fed to turn very, very hawkish when they can see such a rate between job openings and unemployed as we have right now.

 

I basically have a case that once these extraordinary benefits, they will end across the US during September. Then we will have an explosion in a positive sense in the US Labor market. And that is exactly what is needed to convince the Fed of tapering.

 

So my base case is a decision taken in September and then an implementation starting already in December this year. And I expect them to be done already during the first half of next year with the tapering process. So it’s fairly aggressive compared to the scenarios I’ve seen painted by by other analysts.

 

TN: That’s really interesting. I just want to clarify one thing. When you say explosion the labor market, you mean more people coming into the market?

 

ASL: Yeah. And they come into the market and fill these job openings right now, we have a low labor market mobility due to a lot of temporary factors. And once they’re gone, then we should expect employment to be almost running at full speed before New Years.

 

TN: Okay. Okay. Very interesting. Albert, take it away. Help me understand what you’re thinking.

 

AM: Well, I mean, I would agree with him in the old days. Right. But we are in a situation where these tapering assumptions are based on Fed rhetoric and the public comments that they’ve been making specifically addressing his unemployment, unemployment boost or surge.

 

You know, we still have COVID lockdown patchwork across the world happening at the moment. Australia, Japan, Taiwan, and most importantly, China, because no one’s looking right now in China, but China’s GDP looks like it’s not going to surpass two or 3% for the next four or five quarters. With that in mind, where the United States going to get inventory for the holiday season and have this boost in employment surge that we usually get on holiday season.

 

It’s just, to me, there’s so many negatives, so many variables with negative connotations towards it. I can’t see the Fed tapering and just absolutely obliterating the market right before mid term season coming up in 2022. It’s just for me, it’s just inconceivable for them to do such a thing like that.

 

TN: Okay. Understood. So, Andreas, what do you think? Let’s say it doesn’t happen in September. What is the Fed thinking through and what mechanisms do they have to use, say, instead of a taper? Are there other things they can do aside from taper that will basically bring about the same intended outcome?

 

ASL: Well, I want to first of all, address what Albert said on China. I perfectly agree with the view on China right now. China is slowing massively. But I actually find it very interesting that the Federal Reserve is now even more behind the curve when it comes to its reaction function compared to earlier cycles, given that they want to see realized progress in labor markets and not forecasted progress.

 

And we know that labor markets, they lack the actual economic development. So it’s almost a given in my view, that we have a surge in employment over the coming couple of quarters as a consequence of what happened during the first half of the year. So that’s one thing.

 

And the second thing is that what we see right now in China is another wave of restrictions that will lead to renewed supply chains disruptions across the globe. And again, we will have a wave of supply side inflation, which is the exact kind of inflation that we are faced with right now. And given how the Fed communicated just three months back, you have to be amazed by how scared they are of the supply side inflation, even though it’s not the kind of inflation that they like.

 

So I still think that they will react to this, even though it’s supply side driven. What they have in sort of the toolbox ahead of September is obviously that they could hint that the interest rate path further out could be hiked. But otherwise, I think the most obvious tool is to look at the purchases of mortgages. Since we currently have a situation where most US consumers, they are very worried or even scared of buying a house. Timing wise right now, as a consequence of the rapid rise we’ve seen in the house prices. And I guess that’s directly linked to what the Fed is done on mortgages.

 

TN: Yeah. I can tell you just from my observation here in Texas where we have a lot of people moving in. House prices have taken a pause for probably the last two or three months where things even two, three months ago wouldn’t stay on the market for, like, three days. We’ve started to see things on the market for longer.

 

And so, I’m seeing what you’re saying, Andreas, about the housing market. And the question is, can that stuff pick up again, and is it justified? Albert, what’s your response to Andreas statement?

 

AM: The best comparison that we have is the 2013 economy to today’s economy. No one can sit there and argue that today’s economy is stronger than 2013. And look what Tapering Tantrum did to 2013 market. It was an absolute debacle. Yellen was so put off by Bernanke’s Tapering that she refused to do it in 2015. And in 2017, when they even mentioned it again, the market took a leg down. So, with that, right? And especially with Andres mentioning the word inflation, which is an absolute bad word to talk about in DC, tapering would have to have the Fed admit wrongdoing on sticking inflation.

 

When have we ever seen the US Federal Reserve ever take blame for something that’s negative in the markets? They just simply don’t do that. In fact, what I think they’re going to end up doing is allowing a market correction late into the fall and then unleash another $3 trillion of QE with Yellen and Powell to support the markets. So which would be completely opposite of tapering.

 

TN: Yeah, that’s interesting. You have completely opposite views. And what’s your view on the possibility of QE? I mean, is it possible?

 

ASL: Well, I don’t think Albert and I disagree a whole lot on the structural view or outlook, since that QE is a permanent instrument and it’s needed to fund the debt load of the US Treasury. There is no doubt about it. The point being here that the Federal Reserve needs a positive excuse to start tapering. I agree with that as well. And that exact positive excuse will be another couple of very strong labor market reports.

 

That’s exactly what they’ve been telling us. That they want to see between 800K and 1 million jobs created a month would be enough for them to launch a Tapering decision in September. Whether they will succeed with the entire tapering process is whole different question, but I’m looking for that decision in September. And then I guess Albert and I will agree a lot on the market takeaways if they take such a decision.

 

AM: Let me ask you a question Andreas. What would happen if the United States Congress refuses to deal with the debt ceiling and have no fiscal at that point? What would happen then?

 

ASL: Well, in such case, there is a whole lot of issues that you need to take care of as a Fed Reserve. So first of all, I’m not too scared of that scenario. I consider very low probability. I’m interested if you have another opinion.

 

AM: I personally don’t think it happens until at the very earliest November.

 

ASL: Yeah, but, I mean, obviously, every time there’s a debt ceiling deadline, we know that the true deadline is not the suspension deadline, its the deadline when the US Treasury is not able to run on fuels any longer, right? And that would be sometime during late October, there about I agree with you on that. So we basically have a window right now without a whole lot of issuance due to the debt ceiling being in place. And I actually think that’s a decent window for the Federal Reserve to utilize if they want to start tapering, since there is a smaller issuance for the private sector to swallow in such case.

 

TN: Interesting. Okay. What are you guys seeing on the corporate side? Are you seeing strength on the corporate side? I know we just had earnings season and they were very strong, but are you seeing a justifiably strong corporate position to start to taper?

 

AM: Right now, I really don’t. I mean, the University of Michigan Consumer Confidence had collapse. I think today, New York’s Manufacturer Index came in at 18.3, which was an astounding collapses in itself. You know, I personally deal with a couple of hedge funds, and they have been well behind the curve in returns right now.

 

I think the best ones are sub 10% for the year, so they’re gonna have to move back into cyclicals, and they’re gonna have to move back into small caps to make up the difference before the year end. Simply just even discussing that option, it makes tapering, you know, even less of a likely outcome just because it would ruin the market.

 

ASL: Obviously, if you go long small caps right now into a tapering scenario, you will end up losing. I agree with that. That would be kind of the worst. Yeah, exactly. But otherwise, I have to agree that the corporate sector is more doubtful, I would say, than the US Treasury in terms of a tapering decision. I’m much more scared of the corporate debt load than I am of the US Treasury debt load.

 

The State’s currency issue is they can always get rid of such a scenario. But the corporate sector is bigger trouble than the US Treasury into this scenario that I depict.

 

AM: Yeah. I completely agree with that one.

 

TN: Wow. We end on agreement. Guys. Thank you so much for this. Thanks so much for your time. I really look forward to it. Andreas, I look forward to having you back. Albert, of course, we look forward to having you back. Have a great week ahead, guys. Thank you very much.

 

And for all you guys watching. Thanks for taking the time. Please subscribe to our channel. And we’ll see you next time. Thanks very much.