Thread by @Trinhnomics

Good morning🌻: Japan April exports came out WORSE than expected (to be fair only marginally). April in Asia:

Japan -2.4%
China -2.7%
India -0.6%
Indonesia -13.1%
Singapore NODX -10%
Korea -2%
Taiwan -3.3%
Vietnam 7.5% 👏🏻

Thailand is out today & a strong baht isn't helpful🇹🇭

We have May data out of Korea ugly & Taiwan likely worse than April (some were excited by the "bottoming" of April & then May data came).

Still, Japan Reuters Tankan manufacturing mood improved 1st time in 7 months. But I worry that it'll encourage the bad-idea VAT hike 🙄🇯🇵

Markets will watch the Fed minutes (we EM people care very much about the USD b/c it lubricates or shall I say sometimes constricts global activities);

At 2am, people'll pour over the word count & 🙏🏻for respite from JPO - markets priced in rate ✂️✂️.

Let's talk about the USD.

This is something I argue all the time for those obsessing w/ trade-war: the USD is more important than trade-war.

Why? Because it lubricates not just global finance but also global economics. There are 800trn transactions of USD so that is 3200 times the amt affected by tariffs

That is 40 times bigger than the US economy, 61 times bigger than China. So the USD matters. But what about the USD matters? The price of the USD.

When economists say price of money, we mean interest rates. Wut about US interest rates. It rose by 100bps in 2018 so more expensive

The Fed DECIDES THE BENCHMARK price of $ through wut we call Fed funds TARGET rate (lower bound & upper bound); does so through the quantity of $ through purchases of assets.

Current price is 2.5% for upper bound & all that means is that it TARGETs highest for FFR to be 2.5%

👇🏻Fed Fund TARGET Upper bound. The Fed merely targets but its target matters b/c it has OMO operations to ensure targets are met.

The 2.39% is the effective rate (reality of where this rate is); LIBOR & other rates have counter-party risks & other risks).

Price of USD📈📈👇🏻👇🏻

Wut's WRONG w/ the price of the USD 📈 for financial markets & global econ, esp EM.

1st, it make funding costs higher so TIGHTEN FINANCIAL CONDITIONS (yes, leveraged firms & households & gov, ur interest expense 📈) - also Trump reduced interest expense deduction tax incentives.

So when u hear the price of the USD going up, u think man, the weakest link'll be those leveraged peeps.

And as I told u, the USD matters & percolates GLOBALLY. Not just in the US but elsewhere.

In AU, BBSW goes up, in Indonesia, Philippines etc all have to raise rates (TRY?)👇🏻

So all these Asian countries w/ WEAK GROWTH had to raise rates to DEFEND THEIR FX. Why?

a) When the USA is growing strong, rates go up & earnings go up & $$$ chases higher return;
b) Capital becomes SCARCE IN EM;
c) HURT THOSE WHO ARE SPENDING ABOVE MEANS.

So TRY, PHP, IDR, INR

So TRY doesn't like a higher USD b/c it BORROWS A LOT OF IT. So countries that need foreign investors to come plug the funding gap DOES NOT LIKE A STRONG USD.

That's part 1. Financial conditions. Let's talk about ECONOMICS. Why EM doesn't like a strong USD. Remember the J-curve?

The J-curve is the phenomenon where a country's balance of trade initially worsens following a depreciation of its currency, before it recovers to a higher level than where it started.

Reason why it does that is assuming demand inelastic at 1st but FX weakness should help after.

But! That forgets 1 thing - the role of the USD. MOST TRADE IS INVOICED IN USD. Most of China's trade (exports+imports) invoiced in USD. Wut does that mean?

TRADE FINANCING is impacted by the rise & fall of assets & liabilities. Let me explain why a weaker FX may not be helpful

Remember that text book economics DO NOT NECESSARILY REFLECT REAL ECONOMICS.

Why? The USD. 80% of global trade is financed by the USD. So wut happens when the USD rises & domestic FX falls? ASSETS fall in domestic FX so banks look at VAR (value at risk) & says reduce lending📉👇🏻

Let's look at DXY - HIGHER! (Btw, this is not a true picture of the USD b/c it is mostly EUR (58%) JPY, GBP, & CAD so doesn't include EM.

A higher USD is NOT GOOD NEWS FOR EM b/c of both tightening of financial conditions & also IMPACT ON TRADE FINANCING.

Meaning, INVESTMENT📉

Summary:

Markets (global econ&EM) praying 🙏🏻JPO to show signs of LOWERING price of the USD. Why? Can't handle a strong USD. A strong USD➡️Tighter financial conditions, which hurts those too leveraged most➡️Tighten trade financing, causing investment 📉

Sincerely,

@Trinhnomics

If u don't believe me, look at investment in emerging markets (down 📉📉📉📉); look at growth in emerging markets (down 📉📉📉📉), etc

This is why markets ROSE IN Q1 as JPO whispered sweet nothing to markets' ears 👂🏻

He said, "DO NOT BE AFRAID, I WON'T HIKE" 😉
& Maybe, I'll ✂️

Some reading for those interested in long-form:

BIS paper 🤓: bis.org/publ/work695.h…
Speech: bis.org/speeches/sp190…

by one of my favorite economists (if not my most fav) 👉🏻@HyunSongShin 👌🏻

@HyunSongShin Chart of Asian growth in Q1 2019 (read thread above to see why it's so bad). Look at investment, yes we are in contraction (super bad for Korea as contraction QUICKENS) 👇🏻

The bad Asian exports you saw reflect INVESTMENT 📉📉. Meaning, we want the USD to be softer for respite🙏🏻

@HyunSongShin Footnote: That data is for Q1 2019 & Asian exports show no bottoming in April & maybe May so Q2 2019 is defo not V-shaping & very L-shapy.

True story.

@HyunSongShin Update of April exports to include Thailand, which was slightly worse than expected🇹🇭🤢(baht REER too strong):

Thailand -2.6%
Japan -2.4%
China -2.7%
India -0.6%
Indonesia -13.1%
Singapore NODX -10%
Korea -2%
Taiwan -3.3%
Vietnam 7.5% 👏🏻

@HyunSongShin Remember all those people pouncing on my negative trade Tweets saying things like, "Omogosh how do u as an Asian economist not know something like the LUNAR NEW YEAR IMPACT."

It's April guys. CNY was like so 2 months ago 😉 & let me tell u, it's down 📉(not just China, everyone)

@HyunSongShin Suga of Japan (genius at work here after export 📉& basically GDP📉 everywhere except net trade & headline): No postponement of sales tax unless LEHMAN-TYPE hit; SIGNS OF DOWNTURN WOULD NOT AFFECT TAX HIKE PLAN 🤨

Wait for it: Plan stimulus measures if tax hike upsets econ👌🏻