Submitted by Michael Every of Rabobank
Where's the Beef?
As we approach a long weekend (China shuts for the May Day holiday on Friday, and most of the rest of the world celebrates the following Monday), the prevailing sentiment is still moderately risk on – or at least that is what one would assume when looking at USD, which has been on the back foot the last few days. This is presumably because of the ‘victories’ being seen in various places against the virus. Unfortunately, in market terms we once again have to reiterate that this is a case of finding the potatoes but missing all the beef – because the economic damage is only just beginning. And it is terrifying.
Let’s start with the beef. Literally. Long before Covid emerged I was muttering darkly to colleagues that in a future more mercantilist, more militarised world disorder I could imagine food security meaning something far less ‘benign’ than it does today: not so much the ‘can I get food?’ demand side, but the ‘we have the food but aren’t sure we want you to have it’ supply side. Recent developments on wheat in Russia and rice in Vietnam may not have a deliberately Machiavellian bent to them, but they still take us closer to that kind of backdrop.
Meanwhile, with virus lockdowns hitting the supply side we have had reports of Indonesian provinces facing food shortages in staples such as rice, sugar, corn, chili, eggs and shallots. (I can personally report there are no eggs and almost no butter where I reside for now, and have not been for weeks.) Now we see headlines about potential meat shortages, even in the US, due to shutdowns of virus-struck meat processing plants in the States, Brazil, and Canada, who together account for around 65% of world production. There have even been claims that “The food supply chain is breaking.” In response US President Trump invoked the Defence Production Act to force meat-processing plants to stay open – but can you force worried, or sick, workers to turn up to their shift? Unions are also opposed to the decision.
(As a related side-bar, with global animal protein supplies perhaps under threat Australia is calling China’s bluff over its recent “economic coercion” of a potential boycott Aussie beef, among other things, should a public inquiry into the Coronavirus pandemic take place. The Chinese ambassador to Australia has since tried to imply that when he said there could be a consumer boycott if that happens he was not saying the government would make one happen, merely that it might spontaneously occur. China is of course a famously spontaneous kind of place like that.)
From a financial, not agri-commodity, markets perspective this kind of unexpected virus ripple is arguably not compatible with a sustained USD sell-off based on assumptions the war against the virus is close to being over. Rather, it underlines that only the first stage of the first battle is over – at best. Here are a few more very depressing snapshots to make the same point:
- In the UK, British Airways is about to lay off 12,000 staff, or one in four of its total;
- A report from the US Economic Policy Institute argues ‘real’ initial claims in the last six weeks could be north of a cumulative 50m rather than the 30m we will probably see on tomorrow;
- We already saw a published-and-retracted estimate that China has a 20% unemployment rate;
- More than a million Canadians lost their jobs in March according to Statistics Canada;
- South Africa is expected to see a million lose their jobs ahead too according to modelling by a business group; and
- In India, the founder of an on-line jobs portal states that job losses and pay cuts ahead are likely to make 2008 look like a “minor hiccup”.
There is the beef! And there is only gristle for those suggesting inflation is about to get out of control even if we get food supply shocks – at least according to 10-year Treasuries, which are little changed around 0.61% (and that despite a bounce in oil from ridiculously to just incredibly low).
Always the Wombat exception to every rule is Australia, where today’s Q1 CPI rose 0.3% q/q vs. the 0.2% expected and 2.2% y/y vs. 1.9%, so above the RBA’s inflation target band just as the economy collapses in the same way it was well below when GDP wasn’t collapsing. It was also 0.5% q/q on a trimmed mean basis vs. 0.3% expected, and 1.8% y/y vs. 1.6% consensus. That has put AUD comfortably back over 0.65 for now and means we are 10 big figures off the panic low we saw a few weeks back. 10-year Aussie yields are also up 3bp at 0.93%. For all the Aussie bulls, and boy the country seems to produces a lot of them, just recall that the plumpest cattle are being fattened up for a reason.
Elsewhere, Italians will be waking up today wondering who has a beef with them given Fitch just downgraded the country out of cycle to BBB-, one grade above junk, but with a stable outlook rather than the previous negative. Many in markets will be questioning the timing of the move if not the direction, as well as the presumption that everything is stable – because stability is not something we are seeing much of anywhere. Indeed, the stable outlook rests on the assumption that the Italian government will implement a credible economic plan to ensure debt-to-GDP is lowered ahead. Of course, following the downgrade Italian Finance Minister Gualtieri stated pro-forma that Italy will initiate an agenda of reforms and investments to raise the nation’s growth potential while making sure debt declines. One wonders what the meat on those particular bones will look like.