Submitted by Michael Every of Rabobank
Keep on Rockin' in the Free World
It was already going to be easier to have a “What is happening in markets” section and then a separate “What is happening in reality” in this Daily. Things are now complicated by the ‘reality’ no longer being the reality, as the US version of Goskomstat provides jobs data they admit are wrong (counting millions of unemployed as employed, and let’s not even start on how the business births/deaths model ‘works’ when everything is shut down). In short, Friday’s payrolls report was legendary. It was supposed to be down 7.5m and was actually up 2.5m, the largest and most significant ‘beat’ ever.
Goskomstat were wrong, as they say themselves. The economists’ forecasts were also wrong: does that surprise anybody? And the markets are wrong too. They seem to think Trump was right when, with no sense of irony, he almost sang “Keep on Rockin’ in the Free World” about the data. What we have is a not a V-shape but a reverse tick shape: down huge and up a little (and even less than shown). Yes, at least it’s not still down. Yes, some more jobs will come back as reopening begins. But many sectors won’t, and once government payroll support schemes end we will see just how ugly things really are. Oh, and Forbes today underlines that US-Europe air fares are about to double to cover the cost of a nearly empty plane.
Nonetheless, dollar down big, bonds down big, and equities up big: because bad news is good news for stocks and good news is also good news, apparently. On which note, when does the Fed have to do something about longer-dated yields? Because if the market keeps pricing in recovery like this then we aren’t going to have one: that’s the corner we have brilliantly been painted into over the past 40 years by our central banks. Moreover, market bullishness ignores word from Mitch McConnell that any further stimulus likely won’t now get past the Republicans in Congress. Friday saw the president talk about a payroll tax cut and a separate report saying the White House might introduce tax reforms to accelerate the on-shoring of US supply chains from China, with lower taxes floated in areas with higher minority representation and/or business ownership. Keep on Rockin’ in the Free Market, eh?
Meanwhile, back in the real world Chinese May trade data showed their exports -3.3% y/y and yet imports slumping 16.7% y/y: this shows both domestic weakness AND mercantilism that pushes us towards global trade war; and the US is threatening tariffs on the EU and China if they don’t buy more lobster. How emblematic of our times: “Eat more luxury food now - or else!”
Trump is already to remove 10,000 troops from Germany (and the same number of National Guard from Washington DC) as a shot across the bows of peacenik Angela Merkel. Poland will get some of them, and many others could just leave Europe - if this goes through. Not to worry: the EU are ready, willing, and able to fill that gap in vital national security in increasingly uncertain times. Just let them sort out the budget and the economy and the banking system and Brexit and North/South and East/West splits and then build up their own defence industries up first, please, cruel world.
China is meanwhile threatening Australia by saying no more tourists or students should go there (though with the borders shut it is all talk for now); threatening the UK with walking away from building its nuclear power stations if Boris drops Huawei (“Please do!” say the British press); and there are whispers from Beijing of threats that Hong Kongers who claim a British National Overseas passport and then become UK citizens would directly lose Chinese citizenship and right of abode in Hong Kong.
Linking Hong Kong and the US/West are major street protests. There were social-media reports of “Mazel Tov cocktails” being thrown at police in the US over the weekend: I don’t think that happened. Yet in sharp contrast to Hong Kong, the US has already seen a major street in DC renamed “Black Lives Matter Plaza”; New York and LA have sharply reduced their municipal police budgets and raised community funding; and Minneapolis, where the George Floyd protest started, has voted to defund the police department entirely and move towards community-based schemes. Meanwhile, in the UK police allowed protestors to topple a statue of a former slaver (and local philanthropist) in scenes similar to Baghdad when Saddam’s statue fell. Indeed, the British government, which has seen its support drop by 20 percentage points over its poor virus handling, is trying to signal that it supports the protestors in spirit. In the US, Trump is clearly going for a more Nixon-style ‘Law and Order’ approach in 2020, which will at least will leave voters a clear choice.
Removing police departments in one of the world’s most heavily-policed (and violent) societies and tearing down public statues in a traditionally conservative country - those are radical overnight changes.
Should markets take heart that Western democracies are capable of rapid reinvention, mirroring the flexibility that markets themselves once offered? Or should less-flexible markets take heed of these revolutionary headwinds and fear where they might lead next? After all, there is still a LOT of anger out there, and the post-War and post-Cold War architecture is clearly collapsing. Or will markets just shrug and rally exactly as they did after Saddam’s statute fell (regardless of what loomed for Iraq itself)? Note Bloomberg’s top headline today was “AstraZeneca Proposes Gilead Deal Talks” – which is surely tied to hopes of maximizing profit over a potential Covid-19 vaccine. What was the Global Daily saying on Friday about the communist Morning Star’s headline on the day the Berlin Wall fell?
Finally, Brazil has decided to stop reporting Coronavirus death data; one could say markets are doing the same.
Keep on Rockin' in the Free World.