In September, SG launched a new publication called the tariff tracker. The publication seeks to illustrate the effects of trade policy via tariffs, on inflation, consumption, production and trade. SG says the risks from tariffs are significant, but the magnitude and timing of effects from trade policies are still widely debated, and therefore the full extent and duration of imposed and potentially new tariffs still remain uncertain. As result, SG say it’s important to build, over time, a picture and a data set that tracks the fallout of Trump’s trade policies. In the most recent edition, published on Nov 7th, they pick up on Chinese retaliation where the US is vulnerable in specific markets. In agriculture, for instance, a sharp slowing of Chinese imports of US soybeans is already in evidence. Chinese purchases of US oilseeds and grains have also declined. Meanwhile, US companies will find it harder than they expect to pass on price increases from tariffs. Consumers appear to be shifting consumption away from goods whose prices increase as a result of tariffs, such as washing machines, towards other products.
Rapidan has long warned of a significant 2019 supply surplus, and seems to have led where the agencies have followed. In its Global Oil Service review for October, Rapidan sharply raises its 2019 supply surplus call to 1.8 mb/d, up 0.4 mb/d from as recently as September. Rapidan sees Brent at $77 through the first quarter of 2019, before falling to $65 next spring. The outcry over the murder of Jamal Khashoggi has intensified US pressure on Saudi Arabia, and increases the likelihood that Riyadh will stall or delay any formalized, collective OPEC+ cuts. Saudi Arabia will need to maintain production near recent highs, with Trump likely to focus increasingly on foreign policy post midterms. Rapidan breaks down specific issues in this separate piece published on November 2, ranking them from the lowest one to the highest five in terms of likely energy market impact. Climbing US oil production, which supports the outlook for shale in 2019, and signs that the impact of sanctions on Iran will be softer than expected both score three stars.
The PBOC has intervened to defend the yuan since August, but that approach is generating rising costs, argues Logan Wright from Rhodium Group. That’s because reserves are dropping once again, as outflows pick up in anticipation of more yuan depreciation, while foreign inflows into China’s bond market reversed in October. Wright says that politics and the G20 summit may explain the timing of the currency defense, but delaying this adjustment is slowing inflows, and will produce a sharper eventual depreciation of the yuan, he concludes.
MI2 Partners have just published an interesting piece on Japanese banks that highlights the multi-faceted nature of global liquidity. As a nation of net savers, Japan has long been one of the world’s largest marginal supplier of liquidity, and MI2 say this has been further cemented since the GFC with the BoJ’s adoption of ultra-easy monetary policy. As a result, it has pushed Japanese investors to “reach for yield” and increase risk-taking, especially in the property market, but also abroad. a move mirrored abroad, as money has flooded overseas and especially to the US. This is now making Japanese banking regulators and the Bank of Japan nervous, says MI2. Therefore, facing the prospect of mounting potential losses, they are encouraging investors, and especially the banks, to alter their behaviours. As they do, the consequences for the rest of the world may be profound.
Capital Alpha, the Washington DC based research firm, have done some extensive work on looking beyond last week’s Midterms. They put the odds of an infrastructure bill passing in 2019, at this stage, at 40%. However, the White House may have incentives to seek a 2019 infrastructure package to buy a measure of insurance against any drop off in the economy before Trump’s own reelection effort in 2020, as first-order effects of the tax cuts and 2018 budget stimulus are expected to wear off, the Fed continues to press toward normalization amid nervous market reaction, and many predict the onset of a recession as early as mid-2020.
Lack of external capital makes it hard for an emerging market to “extend and pretend”, CreditSights argues in a piece published November 7. Commodity exporters such as Angola, Bahrain, Costa Rica and Oman all stand out as vulnerable in emerging markets, along with Argentina due to its huge current-account deficit. In Asia, Indonesia is seen as having the greatest external financing risks. Unlike Argentina, Turkey’s current-account deficit has been rapidly eaten away. Kazakhstan, Uruguay and Peru, meanwhile, have large sovereign assets so are well placed to withstand sustained turbulence. In another piece from November 5, CreditSights analyses recent emerging-market credit performance. The fact that 10 out the 15 poorest-performing bonds tracked for the preceding week were Chinese or Hong Kong issues, with property developers prominent, may set alarm bells ringing.
Think of this ‘Currency War’ being increasingly fought out through geo-politics, resulting in a clearer future demarcation between the US dollar and Yuan currency zones. Cross Border Capital conclude that, while some economic adjustment will come in the near term through new trade ‘deals’, looking further out the US dollar will decline. The alternative of forcing China to accept a stronger Yuan is politically less likely. More immediately, CBC the consequences of this trade and dollar hardship will be skidding Chinese, Asian and European economies. All are very trade dependent. With limited ability to ease fiscal and monetary policies, the Eurozone seems potentially more exposed to the negative medium-term effects of dollar weakness than China, and in a key year for European Parliamentary Elections. Could the Eurozone be the first casualty in the Battle for Middle Earth?
It’s hard to see how the Australian central bank’s projections for continued above-trend growth in 2019 can be sustained, Westpac argues in a Macro Market Focus week video discussion. The construction sector is showing clear sign of downturn and election uncertainty will be a further drag on activity. Westpac projects that growth will slow to 2.7% in 2019 and predicts that signs that the central bank’s forecasts are too high will be enough to quieten their “itchy finger” on rates. Indeed Westpac believe that the RBA should remain on hold through 2019 and 2020. Meanwhile, the latest statement from the New Zealand central bank contained slightly hawkish tweaks of language and presentation. Most notably they moved away from a near-term rate cut by removing the previous reference to the next move in the cash rate potentially being “up or down”. Further signalling that the next move in rates will be up.
Trump’s protectionism amounts to a supply shock that is negative for both inflation and growth, writes Suttle Economics. This comes at a time when higher rates are already in prospect, as Suttle sets out in this note. But, tariffs on China mean that the neutral rate will rise, because they will be inflationary. On the flipside, this could be offset, to an extent, by the Fed’s balance sheet reduction which is now at a maximum pace, and this is serving to tighten conditions modestly. Suttle argues that this could slow the pace of the Fed’s march back to neutrality. However, the key thing that the Fed will need to be mindful of though, is that Trump’s financial regulatory policy, as well as fiscal policy, is expansionary at a late stage of the business cycle. Suttle describes this as “unfortunate”, which may come to look like euphemism
Chris Granville, in the latest edition of TS Lombard’s Global Political Drivers, sets out the case for a simmering of the trade tensions between the US and China. As part of a broader outline of Trump’s reelection tactics for 2020, Granville writes that as this trade war progresses, the economic costs will tilt away from China and towards the US, and so there lies a strong incentive to put the trade war onto the slower burn that we now predict. In true Trump style, there will continue to be an incoherent strategy path, unpredictable and many false signals, but ultimately he will look to seek some sort victory (however inconceivable) a year out from the election.