Today Is International Happiness Day, And It's All Up To Powell

Submitted by Michal Every of RaboBank

Happy Happiness Day!

Today is International Happiness Day. But are you feeling happy? A large part of your answer might well depend on the Fed, which of course meets today. We know no rate move will happen, of course, which is cheering for some (and deeply depressing for others). But what will their updated dot-plot and press conference show us? Is there still an expectation for all this lack of action just being a pause? If so that will be depressing for some (and deeply cheering for others). Either way we are expecting a US recession in 2020 and only some markets are priced that way, not others, with the economy the S&P just shy of its all-time high.

À la recherche du temps perdu

That equity performance was despite a headline on US-China trade yesterday that suggested -- shock horror!-- that this deal is proving really hard to do, and China might be getting cold feet at the US being serious about enforcement. USTR Lighthizer is now heading out to Beijing on 25 May to try to bridge what are seen as remaining LARGE gaps. Luckily, despite that news pointing out what we have said repeatedly, that the markets are totally wrong to be blithely assuming that this is all a done deal (and that it will last if a deal is done), there was some immediate help from US Agriculture Secretary Perdue, who coincidentally decided to let us know what stupendous sums of US agri goods China was committing to purchasing just round the corner, and how well the discussions were going. Let’s just say I will listen to Lighthizer over Perdue any day of the week.   

Err, Skin May

There’s not too much to be happy about re: Brexit, where total chaos looms. Are we really going to see PM May’s deal offered to Parliament a third time after a fig-leaf ‘paving vote’ --in fundamental defiance of the Speaker’s interpretation of the Parliamentary rules of Erskine May-- the night before Brexit D-Day on Thursday next week, as is now being rumoured? Or May step down in favour of Boris Johnson, as other wild suggestions have it? (In which case much of the Conservative Party will in turn step down too.) Or the EU agree a one-time Brexit short extension to 1 July with no UK EU Parliamentary elections? But what if Article 50 is then revoked at the last minute, undermining the entire EU Parliament, as the UK would remain a member with no representation? Or will we get a longer extension – which the EU is saying is predicated on May abandoning her deal’s red lines? And can the Tories hold together with a Brexit delay in an atmosphere the Telegraph has one minister describing as like “The Last Days of Rome”? GBP clearly has no idea – but Hard Brexit remains uncomfortably close both conceptually and from a linear perspective.

RECIPROCITY, find out what it means to me…

Speaking of Rome, besides the existential Brexit issue, tomorrow’s EU summit also has another major decision to make that markets aren’t focusing on. (There’s a lot of that about, isn’t there?) After having recently decided to dub China as a “strategic rival”, which echoes US thinking even if in this case the meaning was economic and not military, the EU will next be deciding if it is going to adopt a reciprocity rule on foreign bids into its government procurement markets. As the South China Morning Post puts it, “EU moves to block China’s Market Access”. In short, now that the free-trading UK is out of the picture(?) and with Sweden hopefully not making problems, Germany’s Angela Merkel, the hardest working woman in show-the-world-the-liberal-world-order-business, is free to channel her inner Aretha Franklin and push to treat countries such as China, Russia, Turkey, Japan, South Korea, and India as they treat the EU: if their markets are open to EU firms bidding on public contracts, the EU will also be open to their firms, and if not, likewise too. Can I get a round of applause for the real politick? Germany still favours a defence-spending position close to unilateral disarmament, but on the economic front it is shifting away from that level of naivety – and (whisper it) the cherished view that the liberal world order looks after itself.

…take out Italy(?)

Yet that leaves an interesting question: how will Italy vote when it is leaning towards signing up to China’s Belt and Road Initiative and has President Xi visits the country? Is it going to agree to RECIPROCITY or is Xi-Dada going to want some RESPECT? Singing the former tune will rather undermine Rome’s ability to play hardball with Berlin over how loose the purse strings need to get for Italian populism, surely? Yet singing the latter will show it may already be too late for the EU to act as one re: China – and what does that imply for the EU and for EU-US relations?

Not-so jolly hockey-sticks

Today’s BOJ minutes also had a plaintive quality: some members felt that the Bank’s sustainable 2% CPI target is now out of reach right through to end-2021. That actually makes me happy, because it is the first realistic forecast I have seen from a central bank in a very long time. Instead of jolly hockey-stick forecasts where everything just trends upwards due to the assumed trend model being used, which automatically means CPI or GDP must move higher as it is baked into the model cake, we have the BOJ admitting reality. They have utterly failed. The question is then: what next? But that applies to the US, to US-China trade, to the UK, and to the EU just as much.

The Boys from Brazil

US President Trump, on meeting the Tropical Trump, Brazil’s Bolsonaro, has suggested that the latter might be invited to join both the OECD and even NATO. Bolsonaro has likewise stated that he is prepared to support the US vis-à-vis Venezuela, whose embattled regime is still propped up by Russia and cheer-led by China. Markets: watch this space too.

Day ahead

Today is hardly short of points of interest, from the spiralling madness of Brexit to the usual yes/no of US-China trade relations, to the ja/nein of the looming EU summit, to the EU-China angle, and Latin/North American love-ins. Dull it won’t be.

And that’s before we consider the fireworks that the Fed will produce if they do anything at all other than say that everything is awesome – but nothing at all needs to be done about it, ever.

Data-wise we also have German PPI and then UK PPI and CPI, but frankly inflation is not really the market mover it once was.