Submitted by Michael Every of Rabobank
Brawn on the Fourth of July
The US is on holiday today to celebrate Independence Day, which actually falls tomorrow. This 4 July it can do so with some big, brawny numbers to focus on. First of all, jobs. US payrolls yesterday smashed expectations (which consistently have proved not to mean anything in this crisis), rising 4.8 million. Put another steak on the BBQ! Unfortunately, weekly initial claims out the same day showed no sign of any improvement and new unemployment filings were once again 1.4 million. Let’s swap the steak for potato salad. Indeed, with re-openings on pause or being rolled back, and the cut-off point for June payrolls data sampling being around the middle of the month, the likelihood is that things are already stalling even though we are millions of jobs away from getting back to where we were on 4 July 2019.
Of course, the other big number is the virus. New cases in the US continue to surge, with 55,000 in a single day being the latest snapshot. As the Fed keeps saying, if that number does not come down, the other economic numbers are not going to hold up.
Not that this matters for financial markets in any way. They are guaranteed to be alright regardless. More virus equals more free money; less virus means more growth; and if it also means less free money it must therefore shortly after mean more free money. Otherwise markets will go down - and as markets cannot go down, appropriate measures will of course be taken. (The latest being the German Bundestag voting to support ECB QE to end-run the German constitutional court’s questioning of that policy’s validity.) Ray Dalio makes a similar point forcefully today, but isn’t saying anything this Daily(o) has not been saying for a long time. Indeed, I mention what is happening in the real world purely for those who are interested in current affairs rather than markets.
Where these two do intersect are a few key stress points which have the ability to make central banks look as impotent and irrelevant as they actually still are. (Have they sorted out inflation yet? How about climate change? Or inequality? Or curing the virus?)
Primary among these is still the US-China issue. The US Senate has just re-passed the latest Hong Kong bill and so President Trump has ten days to sign it or it becomes law anyway, unless he tries to veto it, risking a Congressional over-ride. Very soon, the clock starts ticking. As Bloomberg notes: “The law gives banks a kind of year-long grace period to stop doing business with entities and individuals the State Department determines to be “primary offenders” when it comes to undermining Hong Kong’s autonomy. After that period, the Treasury Department can impose a variety of penalties on those institutions, including barring top executives from entering the US and restricting the ability to engage in US dollar-denominated transactions. The sanctions would apply to Chinese banks as well as Chinese subsidiaries of US banks…[and will] mostly affect the largest Chinese lenders that do business with the US.”
So no USD for the largest Chinese lenders. How do they help Chinese firms transfer USD to repay external debt? How do Chinese importers transfer funds to those all round the world who sell to them? Simple questions: no simple answers to how China can avoid such US financial brawn.
Naturally, we can expect ‘markets’ to shrug at locking-in a 12-month countdown to a USD “nuclear option” because a constant over the past few decades has been the ‘Hollywood ending’ - as typified by Tom Cruise, an A-list star back in 1989’s “Born on the Fourth of July”, and amazingly still one today. (He seems to have his own personal central bank.) Yet how is that working out as regards Brexit, which is now similarly time-delimited? “EU-UK trade talks break up early over 'serious' disagreements” says the pro-EU Guardian as “EU Brexit negotiator Michel Barnier complained of lack of respect and engagement by UK”. The anti-EU Daily Express says “Boris Johnson blames EU for missing crucial deadline -as trade talks collapse” adding BoJo “has furiously hit back the at EU, blaming Brussels for missing a key deadline in post-Brexit trade talks as the two sides continue to trade vicious blows amid increasing fears of a no deal conclusion.” Tick-Tock.
Coincidentally, the UK is set for its own feeble independence day celebration tomorrow as pubs finally re-open (in the same way that its recently-flagged New Deal amounts to 0.2% of GDP in public spending vs. 40% for the US original). Let’s just hope this does not flag what has been seen in the US and Israel: that four weeks from now virus numbers will ‘mysteriously’ be surging again.
But back to areas where central banks can’t help. Yesterday the Daily presented the simple maths that if 500,000 Hong Kongers were to leave the city and take USD1m equivalent with them then ceteris paribus, the HKD peg would surely have to go as all FX reserves evaporated. In recent weeks we have seen the HK authorities publicly state they will not impose capital controls – which as a key global financial centre should always be unthinkable. Yesterday, after a Chinese official response strongly opposing the UK government making clear it will offer 2.9m Hong Kongers a path to citizenship, the HK authorities had to publicly disavow rumours of a travel ban on its citizens. Yes, that’s where we stand. What does monetary policy have to offer here?
One other one: Jeffrey Epstein confidante (and alleged co-offender) Ghislaine Maxwell has just been arrested by the FBI after mysteriously not being findable despite living in a tiny New Hampshire hamlet of just 1,600 people all along. The book has been thrown at her already, and questions are being asked about how many influential names are going to be named as she goes down. As social media is full of pictures of Presidents Trump and Clinton, and Prince Andrew all openly socialising with Maxwell, some are also remarking: “Ghislaine Maxwell committed suicide tomorrow” or that perhaps it will be a sudden case of Covid-19 instead.
Happy 4 July, America, and British pub-goers!