By Michael Every of Rabobank
All of us, central banks included, are now “data dependent”. But the data – well, it depends!
We just got downside surprises in the US, but the Q3 Atlanta Fed GDP print is holding up for now, and the Dallas Fed services survey, in contrast to the manufacturing one, noted “price and wage pressures increased.” The core PCE deflator today is likely to stay well above 4.0% y-o-y.
The latest European PMIs were awful, but inflation today is likely to show core over 5% y-o-y, as is wage growth – productivity, not so much in all likelihood.
We saw a huge US crude drawdown despite apparent Q2 GDP slowdown; and Freight Waves say if, “higher volumes remain persistent and capacity continues to leave the market, higher freight rates are on the way.”
China’s PMIs today saw manufacturing beat expectations at 49.7 but services fall short at 51.0, as the PBOC takes further steps to try to encourage even more household and business borrowing.
Yes, predicting economic numbers is hard, and more so given data at key turning points are contradictory. But calling whether there is or isn’t going to be a turning point is what analysts and central banks are supposed to do, via a fundamental view that data then informs, and sometimes shifts. If you don’t do that, as Stefan Koopman asked yesterday, why do you have a job?
Trying to help just the right number of other folks lose theirs, the central bankers at Jackson Hole stressed their new fundamental view of global predictable unpredictability leading to higher inflation volatility. As predicted(!), however, many in markets who scour every central bank utterance for what they might do next month didn’t mention that their oracles now say they are without a long-term playbook or stars to guide them, and so ‘higher for longer’.
Regardless, in the past 24 hours we’ve seen:
Ukrainian drones blowing up Russian planes in Pskov;
the Panama Canal facing long-run access problems and higher transit fees;
a coup in oil- and cocoa-rich Gabon toppling another pro-France West African kleptocrat;
Israeli officials warning tensions with Hezbollah are at their highest since 2006, when war last broke out;
China publishing an official map claiming parts of India, escalating tensions there;
Republican presidential candidate Ramaswamy stating he would defend Taiwan until the US can make its own high-end semiconductors – then it’s on its own(!)
It's impossible to predict what will happen on any of the above. But it’s easy to predict that unpredictability will remain, as will fat tail risks.
Likewise, US Commerce Secretary Raimondo, departing China “with some optimism,” publicly complained the country was “uninvestable” due to its “unpredictable” policy shifts. Yet those policy shifts were only unpredictable if one hadn’t read Marx, Lenin, Mao, or Xi, just financial media-ra-ra. Tellingly, Bloomberg Shuli Ren’s ‘Xi’s Live-to-Work Ideology Is So 1960s’ notes:
“China’s President Xi Jinping is not a big fan of social welfare. In past writings, he took pains to explain what “common prosperity,” one of his signature policies, was not: It was not egalitarianism or the rise of a welfare state. During the pandemic, when the US government wrote trillion-dollar checks to consumers, China went for trickle-down economics instead. The government’s stimulus came in the form of infrastructure spending and tax rebates to smaller businesses.
Xi has deep-rooted philosophical objections to Western-style consumption-driven growth, seeing it as wasteful and at odds with his goal of making China a world-leading industrial and technological powerhouse, reported The Wall Street Journal, citing people familiar with Beijing’s decision-making…
This live-to-work mentality is so prominent that even today, it dictates how China calculates its quarterly gross domestic product numbers. The country uses the so-called production-based account, which prioritizes the value-add of each industry and brushes aside end demand. This method also suits local officials well. They don’t need to worry much about what households are up to. They just have to incentivize factories instead. Seen in this light, Xi’s speeches and actions start to make sense.”
Was this unpredictable? Confucianism is about work-ethic over welfare; Marx decried bourgeois desires for a welfare state to keep workers quiet, and was a gold bug, not a free-flowing fiscal fiat fan; and Soviet economies were all about output.
Raimondo now says the US has no desire to decouple from China: it’s just that the US wants to sell more to China while buying less from it – and vice versa. Obviously, decoupling will therefore continue, as predicted in 2016’s ‘Thin Ice’ and 2017’s ‘The Great Game of Global Trade’.
However, some believe no decoupling is taking place. The Economist recently argued ‘Joe Biden’s China strategy is not working’ and ‘How America is failing to break up with China’, and the same meme is heard from those selling ‘Deflation’, ‘Deep rate cuts soon’, and ‘Buy all the things’.
‘Decoupling isn't phoney’ by Noah Smith blows those arguments away. He notes that apart from cars, “What’s astonishing is that [decoupling] already seems to be happening, much faster than one might have naively predicted. China’s share of US imports, which already took a hit from Trump’s tariffs before rebounding somewhat in the pandemic, is now falling relentlessly.” Even if this is due to Chinese firms setting up plants in Mexico, India, or ASEAN, it still echoes what the US experienced since the 1980s. Moreover:
“To the extent that falling investment in China is due to corporate de-risking, it’s probably eventually going to spread all the way up the supply chain. If you’re a US company that moves production from China to Vietnam because of the risk of war, and your Vietnamese factory is importing most of its parts from China, you’ll know it. And you’ll know that you’re still exposed to China risk, and you’ll look around for alternative places for your Vietnamese factory to get its parts and components. That might take time - years even, given China’s dominance of manufacturing. But as long as the risk of conflict stays high for years, companies will keep looking for ways to build entire supply chains that never run through China. And they will succeed.”
And this is all happening without Raimondo offering policy support aside from the CHIPS Act and the IRA, which both show how explosive such state support can be when enacted. As Noah puts it:
“That means that so far, most of the decoupling that’s being done is being driven by the prudent decisions of private companies and investors - natural market forces, rather than the visible hand of government policy. There’s no reason to expect those forces to reverse themselves - even setting aside the threat of war, every nation has seen some manufacturing activity leave for cheaper countries once costs rise. And meanwhile, the engine of US government policy --and European government policy, etc.-- is just revving up. Once policymakers figure out which policies actually speed decoupling without injuring the economy, you can expect them to double down on those. This is only the very beginning of the decoupling story.”
If you accept that this is predictable, you have to accept higher inflation is too on the import side, via fiscal deficits, extra capital spending, and labour market tightness (as President Biden ‘Moves to Give 3.6 Million Workers Overtime Pay’ (can you tell there’s an election soon?). It will probably be higher in terms of geopolitical tensions upstream of shifting global supply chains too.
Of course, that doesn’t mean we can’t get an economic downturn first while we fine-tune the policy of higher rates + acronyms (e.g., today’s news that ‘US Officials Weigh Pathway to Let More Firms Tap FHLB Backstop)’: we can, and very well may do soon.
Yet anyone knowing much about politics would tell you that outcome would be a good predictor for even stronger Western policy support for decoupling stimulus measures. The only questions would be when and how.
To conclude, apart from those chasing data they can’t predict in a vacuum, which accounts for far more funds than you might think, Jackson Hole said everything around us is predictably unpredictable; and yet at the same time it’s also unpredictably predictable.
