Enjoy The Calm While It Lasts

Submitted by Michael Every of RaboBank

Another sleepless night in Hong Kong and not for any of the fun reasons that one might associate this free-wheeling city with. For a second day protestors occupied Hong Kong International Airport (HKIA), closing it down, and this time there was an angrier, more mob-like aspect to it. There were arguments with frustrated outbound passengers; attacks on two men accused of being undercover police, one of whom turned out to be a mainland journalist, with both tied up; the building of barricades; the use of pepper spray, truncheons; and—very nearly—a pistol. Following a court order to leave, the black-clad crowd once again fled. “Be water” is the protestors’ motto but water can boil, or go stagnant. At time of writing, HKIA is open again. Please see here for the report we published yesterday that tries to assess some of the damage, and larger implications, of what is going on in Hong Kong. Trust me, it is about more than just a busy airport being less busy for 48 hours.

For example, China’s Global Times argues it is part of a “colour revolution” aimed at toppling the Beijing government. Likewise, US President Trump last night warned the Chinese army was on the border of Hong Kong, along with helpful advice that “Everyone should be calm and safe!”. Stirring stuff and soaring rhetoric to rally behind from the leader of the Free World – although Trump also stated “Many are blaming me, and the United States, for the problems going on in Hong Kong. I can’t imagine why?” – with no smiley face or wink emoticon; retweeted images of Hong Kong protestors carrying the US flag; and of riot police clashing with them. This suggests perhaps more is going on there than meets the tweet.

One of the key conclusions of the HKIA report we share again above is that part of what is brewing, or should I say stewing, in Hong Kong is a much weaker CNY. However, we saw the complete opposite in offshore CNH yesterday--a staggering surge back through 7 (7.04 this morning)--on the surprise announcement the US will delay the 10% tariff on items such as laptops, mobile phones, and sports shoes from 1 September until 15 December and remove some items from the list for various reasons. Moreover, the US reached out to China to restart trade talks in a few weeks. “Naturally” that news, not the risk of Chinese troops in Hong Kong, is the major financial market headline today – because heaven help us if some Americans had to pay 10% more for a laptop this Xmas rather than in early 2020. Oh the humanity!

Markets, which had been battered by a Eurocrisis low in the German ZEW survey, obviously loved that trade news, with Treasury yields, already lifted by a stronger than expected US CPI print, jumping along with equities. Risk was suddenly on. Yet let’s just examine what this means:

From the Trump end of things the US gains breathing room – even USTR Lighthizer was allegedly blind-sided by the additional 10% tariffs when they were announced back in May. Trump thinks US consumers aren’t paying for tariffs, and now -just in case- definitely won’t be in the run-up to Black Friday and Christmas. Yet he continues to trash-talk China, tweeting just afterward the tariff decision that “As usual, China said they were going to buying “big” from our great American Farmers. So far they have not done what they said. Maybe this time will be different!” Moreover, he is aware that supply chains are shifting from China regardless. Oh, and the little matter that the USD is down, CNH up, and equities up too. Winning bigly, would no doubt be his verdict.

More so given that the NFIB small business survey noted “While many are talking about a slowing economy and possible signs of a recession, the largest economy in the world continues to defy expectations, generating output, creating value, and expanding the economy. Small business owners want to grow their operations, and the only thing stopping them is finding qualified workers.” As I noted yesterday, whisper it, but just perhaps SMEs are not hit so hard by tariffs as they are not so tied in to the global economy? Of course, for larger businesses we have some relief over the latest tariff news, but also more twists and turns that make serious planning impossible.

However, from the Xi end of things--who is cloistered away at the annual Beidaihe leadership retreat to plot strategy ahead of the all-important 1 October 70th Chinese Anniversary--we see a US that can’t stick to a tough policy; is afraid of its own consumers; is terrified of the stock market; and which won’t take a stand over Hong Kong. That suggests no need for Xi to move from a hard-line stance…on all fronts. Consequently, enjoy this opportunity to buy the USD at these levels in China – it almost certainly won’t last. Neither will this overall market bounce away from the recent gloomy trend. Indeed, while USD/JPY jumped from 105.2 to nearly 107 yesterday, it is this morning back at 106.35. At the same time, CNY fixing this morning was 7.0312, again stronger than 7.041 expected, but there was also no appetite to take advantage of the tariff issue to move back closer to 7.

Elsewhere, yes, Italy’s Salvini has been knocked back in his first attempt to call a snap election: but is an alternative government of the pro-market Democrats and the Five Star Movement really feasible? And, yes, UK courts are examining what PM BoJo (which auto-corrects to “Boo” on my computer…is it a closet Remainer?) can and can’t do over Brexit and Parliament, and that the press are speculating over what he can and can’t do over an election: yet without an election is an alternative government comprised of the Liberal Democrats, and rogue Tories, and the Corbyn Labour Party, and everyone else really feasible? Again, enjoy the calm while it lasts.

And, yes, this morning has seen a staggeringly good core machine orders print in Japan, which was expected -1.0% m/m and jumped 13.9%, in y/y terms up 12.5% vs. -1.1% consensus: what to make of that is still unclear. Yes, we have also seen Aussie consumer confidence rise 3.6% m/m, which does seem to have benefitted from lower rates and banks perhaps being allowed to sign off silly mortgage loan levels again. That was followed by wages, which were expected to rise just 0.5% q/q and stay at an unchanged 2.3% y/y but came in marginally stronger 0.6% q/q, 2.3% y/y – but which still underline why large loans are needed, i.e., the absence of decent pay rises. (The RBA’s Debelle speaks late in the day on a panel and will no doubt be in the bank’s usual undeserved self-congratulatory mode.)

But after that we got a major Chinese data dump, and I mean dump, in the form of fixed asset investment (5.7% y/y vs. 5.8% seen), industrial production (4.8% y/y vs. 6.0% seen), and retail sales (7.6% y/y vs. 8.6% seen), while unemployment rose to 5.3% from 5.1%. That’s shockingly weak by Chinese standards and underlines that regardless of tariff can-kicking, the Chinese economy is still in real difficulty. I repeat, enjoy the calm while it lasts.