Submitted by Michael Every of Rabobank
As we crawl towards the end of Q1 it becomes evident that the main theme for 2019, besides appalling far-right violence, is that nobody in charge wants 2019 to actually begin. What do I mean by that? That all we see everywhere is can-kicking rather than decision making.
For example, look at Brexit. After last week’s drama of the UK having now said No to EU membership, No to PM May’s Withdrawal Deal, No to No Deal, No to a second referendum, and No to Parliament testing out alternatives to May’s deal, this week we are either going to see May’s deal reheated and presented once again, like old school dinners, if she feels that she has managed to win over enough rebels; or we are going to see May proceed straight to asking for an extension of Article 50 from the EU summit on Thursday. In that case, is Brexit delayed until 30 June, as now being bandied about, or for a year, or for two years, or effectively forever? Who knows? I would argue that the shorter the length the can is kicked, the larger the threat of Hard Brexit remains, but regardless, this lady is now for kicking. No underlying problems are being solved, however. Even some of the Brexiteers now saying they will back May’s Deal say this is merely tactical, to allow for further sabotage later. (Oh, and Labour’s idea of a “People’s Vote” on the deal is equally mad: how is the EU to deal with the UK passing the Withdrawal Agreement – but only contingent on another referendum months from now?!)
For a second example, look at UK-China trade relations. The news from the South China Morning Post today is that the Trump-Xi summit to sign this “trade deal” --on which I have been voluble in my scepticism-- is now not going to take place in March, or even in April. Now it is apparently going to happen in June. The reason? The same one that led to my scepticism: no agreement from China on the structure of enforcement mechanisms that will mean the deal means something. Of course, that is also epic can-kicking. And again it also suits both parties: China avoids a full-on trade war at a time when almost every real economic indicator except official GDP says the economy is close to what feels like a recession, and US President Trump can tell us every week that a trade deal is imminent, and hence the US financial markets should remain optimistic. Oh, and in the meantime those US tariffs stay in place, and supply chains will continue to bleed out of China to other economies, which the US is hardly. (Which reminds me of what I had suggested to colleagues Trump should have done in the first place from a tactical perspective: announce high tariffs on China to begin in a year’s time as the backdrop to negotiations. That would have seen supply chains move without any inflation at all – and it would also have been a bit Brexit-y.)
Ironically Europe, where can-kicking is as much a part of the fabric of political life as beer, wine, and cheese, might also be breathing a bit easier from the idea of the US and China not yet coming to an agreement (and yet permanently being close to one). After all, there are a series of stories now suggesting that as soon as Trump is “done” with China he will start a serious trade war with the EU over agriculture and autos. That would bring the threat of biting recession straight to their front door, rather than loitering around the back.
Furthermore, the US Federal Reserve, when they meet this week, will also try to send the message that doing precisely nothing is exactly the right action to take. (Of course, we have a strong view on what they will be doing next eventually, and it’s not raising rates.)
In short, 2019 is aping 1984: not just on the invasive/repressive technology front, where China is leading the way, but in that its vision of the future being a boot kicking a can down the road – forever.
The week has already seen data showing why that can needs to keep moving down that road, with Japanese trade data showing exports -1.2% y/y and imports -6.7%, while industrial production was -3.4% m/m. Today we have only second-tier numbers in the form of Eurozone trade data and the US NAHB housing survey.
Tomorrow it’s a speech from the RBA’s Kent, likely to remain deeply in denial, and then Aussie house prices for Q2, likely to remain deeply in the red. Then we have the RBA minutes, likely to remain deeply in denial and making my face deeply red. We have UK unemployment and wages, and the German ZEW survey, and US factory orders.
Wednesday it’s the BOJ’s minutes, another RBA speech, German PPI and UK PPI, and CPI, then the Fed rate decision and updated projections along with the accompanying press conference.
Thursday has Kiwi Q4 GDP and a Eurozone summit, where British PM May will be attending to ask nicely for that Article 50 can-kicking. There are also Aussie jobs data and UK retail sales, the Bank of England meeting, and the US Philly Fed survey.
Friday rounds us off with Japanese CPI and global manufacturing and services PMIs for March, which are very preliminary at this stage, then UK government borrowing and Canadian retail sales and CPI, followed by US existing home sales.
All in all, it’s second tier stuff for the most part, and the larger action will be on those cans and those boots. After all, “Who controls the markets controls the future”…right(?)