Daily BriefsMacro

Macro: ‘Japanification’ Is Coming and more

In today’s briefing:

  • ‘Japanification’ Is Coming
  • Floods/ Fertility/ Prosperity/ Enmity/ Walls
  • Not “risk-On” or “risk-Off”, Rather What’s the Risk?
  • US Economy Enters H2 Robustly, but Fed’s Outlook Being Increasingly Questioned by Bond Investors
  • UK: Retail Gorges on Failing Normalisation

‘Japanification’ Is Coming

By Michael J. Howell

  • World markets are facing a major policy error ahead
  • Taper-talk is a worry, but QE is not the real problem
  • Policy-makers want to end QE, but keep interest rates low
  • Too much debt is the bigger problem, and low interest rates encourage debt
  • World is falling towards a ‘Japan’-like debt trap

Floods/ Fertility/ Prosperity/ Enmity/ Walls

By Diana Choyleva

China News That Matters

  • Deadly rains in central China
  • Not one, not two, but a “three-child” policy 
  • Zones “R” Us
  • US and China agree to meet
  • Seal off the borders! New walls, old fears
  • In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.

Not “risk-On” or “risk-Off”, Rather What’s the Risk?

By Olivier Desbarres

In the past fortnight US Treasury yields across the maturity spectrum have oscillated in reasonably wide ranges, with the highs coinciding with the release on 13th July of US CPI-inflation data. The shape of the yield curve today is almost the same as it was on 8th July.

The US rates market has tentatively found its feet, for now at least – tentatively because volatility remains reasonably high both in terms of yield levels and yield spreads.

The pace of Dollar NEER appreciation has also slowed and volatility remains low while the S&P 500 and Brent crude oil price have been choppy in multi-week ranges.

The inverse correlation between the Dollar NEER and S&P 500 has somewhat broken down so far this month. We estimate that since 28th June the S&P 500 and Dollar NEER have respectively gained about 1.8% and 1.2%.

In that sense the Dollar has not traded like a “safe-haven” asset, at least not in the purest sense of the term in our view.  Instead the appreciation in the Dollar NEER since 10th June has largely coincided with the flattening of the 2s-10s Treasury curve.

Finally, the relative performance of major currencies does not clearly point to either “risk-on” or “risk-off” having prevailed, in our view. Since the 36-month low in the Dollar NEER on 10th June, weighted-baskets of EM currencies (excluding Renminbi) and developed market currencies have both depreciated about 3% versus the US Dollar.

Our overall take is that US (and global) markets in recent weeks can neither be categorised as “risk-on” or “risk-off”. Instead it has been a case of “what is the risk?”.

Specifically we think markets are still weighing whether i) they should be more concerned about a potential slowdown in US and global growth or CPI-inflation remaining sticky at high levels and ii) how central banks will adjust monetary policy, in terms of their QE programs and outlook for policy rate hikes (an arguably granular picture at present).

Macro data point to rapid global economic growth having slowed in June (but remained positive) and we will elaborate on our outlook in the next FIRMS report.

US Economy Enters H2 Robustly, but Fed’s Outlook Being Increasingly Questioned by Bond Investors

By Said Desaque

According to the National Bureau of Economic Research (NBER), the Great Lockdown was the shortest in US history, thereby raising questions about the necessity of continued stimulus, notably by the Fed, but employment remains well below its previous cyclical peak. The economy is displaying some late-cycle signals that are historically associated with impending overheating, but US Treasury investors are discounting a significant slowing in economic growth and, consequently, reduction in inflationary pressures.

Recent US inflation overshooting is partly related to supply chain dislocations caused by different COVID-19 vaccination policies adopted by sovereign governments and disruption to global trade, but pressures due to the latter could persist for the remainder of 2021. Despite falling recently, congestion at US West Coast ports could rise further if vessels are forced to wait for cargo from exporters before returning to their point of origin under new laws being considered by Congress.
Real-time data on the US economy shows continued recovery in consumer services in H2, although housing activity has been steadily cooling during 2021. Manufacturing activity remains buoyant, underpinned by robust consumer spending, but semiconductor shortages are holding back output and sales of automobiles.
The recovery in revenues has significantly boosted US companies’ financial health, thereby allaying last year’s fears of excessive leverage when firms took advantage of the Fed’s intervention in corporate credit markets. Meanwhile, a policy mistake by the Fed presents the biggest threat to the corporate sector, particularly a slow reaction to persistent upside inflation outcomes in 2022 H2 that forces more hawkish policy settings to satisfy bond investors’ appetite for higher inflation-adjusted returns.     

UK: Retail Gorges on Failing Normalisation

By Phil Rush

  • The mix of UK retail sales in Jun-21 made the outcome a disappointment, despite dull headlines. Food sales offset widespread declines in opposition to the desired unwinding of retail’s rotation. The failure to normalise threatens the recovery’s extent.
  • Rising infections are fuelling a broader surge in disrupted behaviours. Several hundred thousand people are legally required to isolate with guidance and school closures afflicting double that again. We still expect the recovery to disappoint in H2.

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