Rabo: The Reflation Trade Is Being Erased By The Market
By Michael Every of Rabobank
10-year US Treasury yields are back at 1.35% again and 30-years below 2%, both the lowest since February; the US Dollar is up, not down; US equities are (finally) down, not up; oil is down sharply not up; and overall, it looks like the reflation trade is being erased by the market – at least for now.
The RBA certainly kept things steady yesterday, even with the expected refusal to roll the benchmark bond for its 3-year yield curve control backing the view rates will rise….by April 2024. Only the RBNZ is still taken as moving closer to near-term hiking, and while the 2-year yield is up from below zero in September 2020 to 0.82%, the 10-year yield is 1.78% vs. 1.93% in March, and even NZD is around 0.70 when it was as high as 0.7436 in late February.
Tellingly, a recent Politico article stresses “Workers are reaping benefits in the post-Covid economy. But their power may not last”. (Which is why the UK yesterday also saw a survey that 67% of those under 35 want a socialist government, mostly in reaction to high house prices and rents: and this is not changing with age any more than high house prices and rents are.)
Of course, worker power can shift if the White House acts for full employment – but as we have stressed, this also requires major moves on supply chains. That is both easy to say and hard to deliver. Which reminds me of the eminently-forgettable 1996 movie ‘Eraser’ starring Arnold Schwarzenegger. Teutonic Arnie always pronounces his Ts as Ds, yet somehow we still got the line: “We have to go to Adlanda to get the dayda from the compuda.” That is also easy to say and hard to deliver. Importantly, in today’s context this phrase suggests supply chains *will* shift.
China’s State Council has announced it will improve regulations and laws regarding data security and cross-border data flow, while increasing supervision for overseas listings of Chinese firms. As Bloomberg puts it bluntly: “Didi’s Fiasco Shows Beijing Wants No More US IPOs” – which is something US China hawks have been pushing for. The data-security issue will also set up a ‘lawfare’ clash of US, EU, and Chinese regulatory requirements; and Bloomberg also notes “Hong Kong Gets Its Great Firewall, One Brick at a Time”. At the same time, the Global Times lauds a new plan to launch 10,000 new SMEs so by 2025 China will develop “little giant” enterprises specializing in niche sectors, and 1,000 champions in a single industry; the focus is “on breakthroughs in specific and critical sectors and supply chains where the country may be vulnerable amid a spiralling technology war”. This logically leads to either decoupling or Chinese, not Western, firms controlling said critical sectors. Which sound like national security to many.
Staying on dayda, compuda, and hi-tech weapons, Amazon is happily singing ‘Yub Nub’, or “Yup, ‘nuf”(?), now the return of the JEDI – the Pentagon’s cloud computing plan – includes them as well as Microsoft. Because Amazon is obviously short a few billion bucks: and who wouldn’t want the same firm that chooses which global suppliers you get to see on your screen; delivers your goods; owns the newspaper you read; in which the reviews of the TV shows, and soon movies, it produces are written; and which is lobbying to avoid paying more tax; to not also own key parts of the national defense infrastructure?
Contrast with the approach in Beijing.
Elsewhere, the White House has stated “We will take action” on Russian ransomware criminal actors if Russia won’t. What this might be and when is not clear – more so given the US is asking Russia for help with finding a Central Asian military base following its Afghan retreat.
Meanwhile, Germany has arrested the owner of a think tank on allegations of spying for China – to which the Twitter reactions included “Now do the US”; the Estonian consul in St Petersburg has been detained for receiving classified dada; Belarus has jailed the presidential opposition candidate for 14 years, and is telling the EU it “will not stop a migrant border surge”; and Lithuania is pushing for an EU summit with China to replace the dual German-Franco and ‘16+1’ approaches, which would be a lot less Beijing friendly than the “auto” pilot we get from Berlin.
In short, while reflation is being erased, so is much of the existing geopolitical order on which low-flation was predicated. But what comes next, and when, is even less clear than the rate-hike horizon. If seen, change will start with the geopolitical, but then broader supply chain moves will flow from there.
China’s course appears to be set; what the US will do about it ahead is uncertain; what the EU *can* jointly do even more so, and obviously depends on the next German and French election; Japan, Australia, and India are obviously moving closer to the US. And yet further muddying the waters for those drawing easy ‘East vs. West’ conclusions is an analysis of Russia’s latest National Security Strategy (NSS) from 2 July from a Russian international relations academic.
The NSS obviously excoriates the West, and refuses to use the term Indo-Pacific, sticking with Asia-Pacific. Notably, however, relations with India and China are combined in one paragraph, while in the 2009 and 2015 NSS, they were separate, with China preceding India; this suggests balancing relations with China is becoming increasingly important for Moscow. Indeed, there is no mention of a ‘new era‘ (which China has used in bilateral documents since 2019), and relations with China are no longer characterized as a “key factor in maintaining global and regional stability,” as in both 2009 and 2015. The NSS also flags the vulnerability of Russian information resources, including critical infrastructure, due to the use of foreign technology and equipment – and that apparently means *all* foreigners. Let’s see what Russia ultimately decides on 5G, etc.
This all sounds like the kind of geopolitical world in which a 1980’s-era muscular Arnie would thrive – just without the whole Reaganomics thing, thanks very much. Or at least he would if the movie studios weren’t owned by global firms who would rather just erase this troublesome perspective.
Anyway, back to another day of dayda on my compuda. And waiting for the Fed minutes, which will also only speak to only a fraction of the actual underlying global narrative.
Wed, 07/07/2021 – 10:35