As Of Midnight Tomorrow The WTO Effectively Ceases To Function

Submitted by Michael Every of Rabobank

Bananas for International Settlements

Friday’s US payrolls were strong, albeit boosted by the return of GM workers after a labor dispute. The 266K report and 41K two-month upwards revisions, 3.5% unemployment rate, and 3.1% y/y average earnings growth (albeit on a 1-tick miss in the m/m print at just 0.2%)--to say nothing of the stronger-than-expected Michigan sentiment and consumer credit surveys--all combined to provide a warm seasonal glow to optimists. Quite the contrast with appalling Canadian jobs numbers, the equivalent of a –612K US payrolls print, which would have turned Justin Trudeau’s face whiter than it was when he realized that video of him laughing at Trump at the NATO summit had leaked online, and with more weak German industrial production, -1.7% m/m, which was enough to put a chill in their mulled wine.

However, we then got a US banana skin too. Larry Kudlow hit all the wrong notes when trying to tell us ‘a trade deal is comin’ to town’: in his own words “the final strokes are not there” due to China’s unwillingness to agree on the scale of agri purchases and “there are no arbitrary deadlines on any of this. Hence there is no guarantee that there will an agreement reached before Saturday, when the next set of US tariffs kick in on Chinese exports. That means five trading sessions to position correctly for either a phase one deal, or a can-kicking, or a further escalation of trade tensions. When deciding consider:

Another banana skin. Chinese trade data out showed shipments to the US -23% y/y, which is quite incredible, and what you call a trade-war impact in a US economy sucking in goods from everywhere else.

The headline data also showed China’s total exports -1.1% y/y in USD terms vs. a slight 0.8% gain expected, while imports were up 0.3% y/y vs. an expected -1.4%, whittling down its huge trade surplus. Yet for those looking at the rise in imports and thinking “See? China can be a source of global demand beyond commodities and very high-end tech!”, on an underlying basis stripping out things like oil and iron ore, the surplus is still at a record level; Beijing is reportedly forcing the removal of all foreign computers and software to boost the domestic tech supply chain; and in Taiwan it is paying double and triple the going salary for chip engineers to lure them from firms which no longer want to sell to them (3,000 have been won-over recently). So opening up or doubling down in this vital week?

And a huge banana split on global trade. As of midnight tomorrow the WTO effectively ceases to function unless the US allows appointments of new appellate judges to the final appeals forum, the Appellate Body, after the terms of two of the last three sitting judges expire – at which point, ironically, only China’s representative will remain. After that, if you want to appeal a WTO ruling there will be nobody to hear it, and even cases already under consideration will grind to a halt. In effect, the referee leaves the field of play just as we move from playing games to playing The Great Game. Some more from the WSJ:

A stalemate between the U.S. and other members of the World Trade Organization, including the European Union and China, stands to cripple the organization’s top court, threatening the global body’s survival.

On Wednesday the court, called the Appellate Body, will no longer have enough judges to rule on big trade disputes between countries.

At stake are international rules negotiated over five decades by the U.S. and Europe to boost global trade. The WTO, established in 1995, is the most significant outcome of that effort, helping to head off damaging cycles of tariffs and retaliation between countries. Now it’s stuck.

Efforts to modernize WTO rules for challenges such as China’s market-distorting state capitalism have repeatedly failed. Talks among its 164 members to regulate e-commerce and other new arenas have stalled for years. And a trans-Atlantic dispute over operations of its top court has sparked the split now threatening the organization’s core.

The WTO is in crisis,” said Cecilia Malmstrom, who last month ended her term as EU trade commissioner. “If nothing happens, it will become irrelevant.”

On which, Pentagon Indo-Pacific Command Defence Secretary Esper wants to shift US troops from the Middle East, where there are few bananas, to further east, where there are lots, in order to “compete with the Chinese, to reassure our allies and to conduct exercise and training.” A new US military base, coming soon to a location near China near you! Obviously 100% compatible with a real trade deal. Meanwhile, looking a bit of a nana himself, just as the US drops its focus on the war on terrorism and looks east, France’s Macron thinks he is being visionary in pushing for a European/NATO war on terrorism.

Wherein today’s must-see is a video clip of Nancy Pelosi explaining to a journalist why she chose not to impeach President George W Bush (that adorable guy who shared candy with the Obamas, who themselves just bought a USD12m property in Martha’s Vineyard). Pelosi states as a member of the top-level intelligence committee she *knew* there were no Iraqi Weapons of Mass Destruction and that the US was being led/lied into a war that cost thousands of Americans’ lives; killed hundreds of thousands of Iraqis; destabilised the Middle East; empowered Iran; allowed the creation of the Islamic State; cost trillions of USD; and moved its strategic focus away from Asia at a crucial moment in history. But this was not impeachable in her opinion, because the American people seems happy to go along with it. Oy vey.

Which is something one also wants to say when reading the latest BIS reports on the US repo crisis and the FX markets. The BIS say US repo problems are a structural issue linked to big banks’ big holdings of Treasuries – and aren’t going away even as the Fed throws money at it, as central banks always do under pressure.

Art is perhaps imitating life here given at Art Basel, Miami this weekend artist Maurizio Cattelan taped a banana to a wall and it was suddenly valued at USD120,000 and sold to French collectors. Then another artist, David Datuna, took the banana off the wall and ate it as a piece of ‘performance art’ called “Hungry Artist”. Value: zero. As another artist cried with zero sense of irony as he did so, “Are you kidding? This is so stupid. This is so stupid.” Not to worry though: there is a surviving edition involving another banana valued at USD150,000. See? Central banking does work! Perhaps with a bit more NOT-QE we can get a USD1,000,000 banana?

Meanwhile, the BIS warning is that investors and dealers have innovated their way to spreading their FX capital more thinly than before, fragmenting market liquidity across multiple platforms…and when that liquidity dries up during the next phase of global turmoil, volatility will surge. In other words, “during periods of stress, FX dealers might ration and favour clients with whom they have a strong relationship, such as those using their single-bank platform. Customers who spread execution across venues could face a sharp evaporation of liquidity.” Or in other words, split your banana too many ways and its going to be inedible just when you need it the most.

So, we have the US warning that a trade deal may not be close just as we head towards more tariffs; the WTO about to grind to a halt; the Pentagon warning on US troops moving east; the BIS warning neither the US repo market nor the global FX markets are as safe as they look; and renewed friction with North Korea over nukes too. And that’s before we get to the UK election on Thursday - which is nuts