Submitted by Michael Every of Rabobank
Let’s start today with the traditional wrap up of what was worth noting from Friday’s US labor market report. Firstly, it definitely suggested that on a headline basis, we are in a phase of jobs growth that is still set to stun market bears. The magic payrolls number was 128K vs. just 85K expected, and with upwards revision to the previous two months, including September from 136K to 180K and August from 168K to 219K. Moreover, that was despite a strike at GM in the survey period that would have dampened results by 41.6K that is going to be reversed in the next set of data. The unemployment rate actually edged up to 3.6% as the labour force grew, and there was no change in hours worked, while average earnings growth was a moderate 3.0% y/y, as expected.
So far, so good, even for a lagging series. In terms of the impact on rates markets, there was an obvious move in US Treasury yields, which jumped from 1.67% to 1.74% before closing at 1.71%. Likewise, it was good news for stocks, with yet another record S&P high now hanging on the utility belt. Obviously, the Fed liked the data a lot, especially since the three unforeseen-and-on-paper-now-unnecessary(?) rate cuts this year can be put forward as having allowed this all to unfold in classic post hoc ergo propter hoc central-bank thinking.
The Fed’s Kashkari then turned a phaser on traditional economic thinking with his comment that “Maximum employment is a labor market consistent with 2% inflation. Until wage growth, net of productivity, is at least at 2%, we can’t be there yet (and we’re not now). And that ignores the potential for labour share to increase, which it might.” Obviously the message is that US rates will stay low, or can go lower, despite the strong labour market. Yet it is entirely possible to have zero unemployment and zero wage growth net of productivity in perpetuity. It’s called slavery – and, tragically, it still goes on in some parts of the world. Kashkari alludes to this with talk about the labour share, which--shock horror!!--is Marxist terminology. Yet it’s not clear if this is full recognition that the political structure within which the labour market operates actually matters or not for the Fed’s models, or if it is just looking for an excuse to do all it can to juice the asset markets. (And Marx had a lot to say about what a mess financial capitalism ends up in when it relies on speculation and not productive investment…as do an increasing number of serious contenders for the Democratic Party presidential nomination.)
Short term, of course, the market will be happy with the buzz it gets from a phaser set to a weak ‘stun’, as jobs grow and rates shrink, in a Star-Trek equivalent of glue sniffing; yet the market simply doesn’t want to grapple with the political implications that are looming when those same phasers are set to ‘kill’ by newly-elected bridge crew. I can wholeheartedly assure you when the penny drops it will be akin to James T Kirk’s classic “KHAAAAAAAN!” moment.
Meanwhile, on the other source of market optimism, the US-China trade deal, phasers seem to be set for ‘stun’ but have actually been set for ‘bum’. That is because while President Trump is tweeting about whether to sign his “phase one” deal in Iowa or Hawaii (Think: where are the swing voters? Not Honolulu), all signs point to what we concluded a long time ago (when young people still knew what phasers were in popular culture): this is a bum deal. Why do we say that? Without referencing our own work again, consider:
- US House Speaker Nancy Pelosi has just said Democrats are ready to get tougher on China than Trump by aligning with the EU against it. Of course, the Democrats are bending over backwards not to mention China pre-election in exactly the same way as Greta Thunberg, and the EU has generally been in ‘surrender-monkey’ mode – but this does suggest Trump might actually be the trade dove at this point in time.
- The head of the US Chamber of Commerce in China is quoted as saying of the phase one deal: “Of course, it’s helpful for the farmers and I’m glad to see farmers benefit, but that’s not really what we’re looking for….it’s not addressing the systemic trade issues that the business community would be concerned about on a long-term basis…For every government policy in China, there’s a contradictory policy. The government says, ‘OK, we’d better do a bit more to help the foreigners’, but does that change industrial policies? Does it change that the state sector is dominant? No. As long as they have plans that Chinese enterprises should have more and more market share in China, in their sector and globally, we know that they will welcome us, but only with conditions.” Indeed, phase one on US-China trade seems an empty box in most respects, and we don’t expect there is a phase two to follow.
- China’s Shanghai Import Expo is about to get rolling to almost as much fanfare as last year’s inaugural event…where actors were allegedly hired to pretend to be buyers. Question: What was Chinese import growth y/y in USD in September 2019? Answer: minus 8.5%. Australia is sending a government representative to accentuate the positive (and in local terms it is a rare positive), but the idea that China is about to be a major new source of global import demand seems science fiction.
- US Commerce Secretary Ross is suggesting sales to Huawei will begin again soon. Yet that overlooks: (1) China is plowing tens of USD billions into its pre-fab industry to make sure US chips aren’t needed in the near future, and there will be no going back on that; and (2) the US is leaning on Taiwan’s top chip maker TSMC to stop selling to mainland China, including Huawei. Is that because the US wants to sell the chips instead, or because it doesn’t want anyone selling that tech to Beijing?
So do please look past market technobabble as dire and internally inconsistent as the dialogue in Star Trek Discovery, and political snake-oil, and recall that phasers are being deliberately set to ‘stun’ and/or ‘bum’. Honestly, it’s only Monday and already one wants to say ‘Beam me up, Scotty’ (despite Kirk never actually saying it) or just “KHAAAAAAAAAN!”