Rabobank: Who? WHO?

Submitted by Michael Every of Rabobank

Who? None other than Fed Chair Powell - saying on ’60 minutes’ for a mainstream audience that “Assuming there’s not a second wave of the coronavirus, I think you’ll see the economy recover steadily in the second half of this year.” However, he then added “For the economy to fully recover people will have to be fully confident, and that may have to await the arrival of a vaccine,” and that a full recovery could take until the end of 2021. So while no Great Depression in his eyes, no V-shape either, and no return to normality until medicine or nature step up to the plate. That looks a timely call as Friday saw retail sales collapsed the most on record in April.

Powell also reiterated that he was not of the view that negative rates will be useful in the US, but that there is a lot more the government can do, perhaps via direct support to states and municipalities. Moreover, he stressed there is a lot more the Fed can do too – so yield curve control and more QE? At least that’s what he’s most likely to explain to the Senate when he testifies tomorrow. In which case, then Fed will be hoovering up more of the safe (and not so safe!) US assets out there that markets would otherwise be able to get hold of. And failing to do so will see a further USD liquidity squeeze as the rest of the market steps up to buy those safe assets instead.

Meanwhile, the ‘WHO’ is in focus today as geopolitics comes (even more obviously) to the World Health Organisation. We are going to see a motion (with the final vote apparently Wednesday) to push for an international investigation into the origins of COVID-19. The one that the sudden problems exporting Australian beef and barley to China have nothing to do with. (And – who?! The Aussie Trade Minister is now warning about the risks of doing business with China and that firms may want to look at diversification!)

So far at least 62 countries including Russia(!), and perhaps as high as 116 together with a block of African states, are co-sponsoring a motion for a virus investigation. China and its supporters are not. The event has all the makings of a contemporary Khrushchev-bashing-his-shoe-on-the-table-at-the-UN moment.

More so as on Friday the US Commerce Department tightened its limitations on the export of key technology to Huawei, this time with what look like real teeth, to target third parties and third countries; and China’s Global Times immediately reported that Beijing is considering striking back with measures at key US firms, including Boeing. Plus US Secretary of State Pompeo has just warned Hong Kong that “any action to interfere and impinge on Hong Kong’s freedoms” in the form of steps against US journalists, who have already had to leave China in some cases, “would impact” the looming US assessment of Hong Kong’s autonomous status.

The latter will now come after this Friday’s National People’s Congress (NPC) in Beijing, which is expected to announce several key policy decisions with market impact. One will be if there is a GDP growth target for 2020 or not, and if so how high; another will be how to achieve it, with the same fiscal vs. monetary vs. outright monetization debates reportedly taking place in Beijing as in the West, and as debt soars regardless – the IIF now sees China’s total debt-to-GDP ratio at 314% and rising rapidly; a third may be China’s international stance, and whether to continue to with its “Wolf Warrior” diplomatic stance. Recall all these decisions will be taken as the BIS show that CNY only accounts for 4.3% of international currency transactions, up from 4.0% in 2016, vs. 88% for USD, which is also on the other side of 95% of CNY transactions. Indeed, the BIS conclude the Chinese currency has made “marginal progress” in its internationalisation in the past three years. That backdrop does not sit so well with either major monetization of debt or global feather-ruffling.

Can one say the same for the UK and GBP? PM Johnson, taking brickbats at home on several fronts, has said that the virus is going to linger in Britain, which does not suggest a return to full normality. Johnson also apparently refuses to embrace austerity, which is sensible,…but then places the responsibility on the BOE - who are already monetizing a small portion of the new UK debt, pretending that QE is not more of less the same thing in real terms, and are now openly talking about negative rates ahead. All that is happening as the UK and the EU are walking in opposite directions over a new trading relationship, with a non-negligible likelihood that Hard WTO Brexit will follow at the end of the year. Put that kind of major monetization and global feather-ruffling together and we have Cable at 1.2099 when we started at 1.32, so down 8.7%.

So this remains the trend we expect to see: more monetary easing; more fiscal easing; more de facto monetization behind acronym fig-leaves – or maybe without; and hence more downwards pressure on FX and upwards pressure on USD. Oh, and lots more geopolitical rumbling both as cause and effect. Look to Japan and see why.

It is now officially in recession, with GDP in Q1 sinking -3.4% annualised vs. -7.3% in Q4, and the outlook for Q2 is even uglier. The government is talking about a 20% of GDP fiscal stimulus package - and we have both BOJ JGB (and ETF) guzzling and yield curve control. Yet JPY is up 1.5% YTD vs. USD. This is due to the risk-off Yen function; and that is because it runs current-account surpluses.

Apart from the US, who can run a massive current-account deficit and still MMT away happily because of the global need for USD, it’s that magical current-account surplus that will dictate if a country can sustainably use MMT to prop up its post-Covid economy without markets then pricing for a Weimar or Zimbabwe endgame. BUT NOT EVERYONE CAN DO SO AS A SURPLUS IN ONE LOCATION IS A DEFICIT SOMEWHERE ELSE (and the US can’t and won’t be that for everyone. Certainly not for China.) That means more supply-chains shifting, and from a far broader interpretation of ‘national security’ than just who and can’t make masks.

It’s about who can and can’t make money.