Hello from Hong Kong - the weather has turned colder as we head towards the winter, which is intensifying EUR weakness as colder weather adds to the energy crisis as well as seasonal spike of Covid & thus lockdowns/protests. Jerome Powell got the job & key for USD & rates ⏫⏫🔥
Since his confirmation again, note that no matter the administration (Trump or Biden), the Fed continues on w/ the same person in charge w/ relatively dovish policy as real rates super negative.
But Jerome Powell is more free to rock the boat now & markets price HIGHER rates.
Look at markets' implied expectations of interest rates. On Bloomberg, type MIPR GO (weird to care about rates after decades of ZIRP) but rates markets are on the move & after the vol this year, it's heading one direction - upward. JPO talked about corrosive impact of CPI, so?
So this is basically team "transitory" moving towards doing something about CPI & markets listened. It has listened & questioned the Fed mantra of QE tapering divorced from interest rates lift off & started selling bonds, esp the short-end. Here we are. USD rates matter globally.
If the price of cash is less TRASHY, basically increasingly less negative as expectations of rates go up to narrow the gap w/ inflation, then RISK assets pay attention. And it isn't just risky assets. Relative value w/ others such as EUR. Let's take a looksie. Btw, PMIs out today
To understand the relationship between FX & rates market, we must think in relative value & the CHANGE of that relative value.
Here u see markets expecting higher RATES in the US but look at the Eurozone, higher but by LESS than USD. Why? Well, it goes back to macro & monetary.
The price of the USD is its interest rates, which are going higher as expectations of a stronger economy + CPI = Fed tapering + higher interest rates in 22. What about the price of EUR? Well, higher but markets still sees NEGATIVE RATES. Why? PMIs were strong but starting to sag
Why is it sagging? Covid-19 reaction function + energy crisis. Higher cases = now lockdowns in EU while in the US even w/ higher cases in the summer no lockdown. US & Europe differ in the energy crisis, one net exporter & the other importer. MOST KEY is monetary policy divergence
Christine keeps saying that INFLATION IS TRANSITORY, as in even if it goes past the ECB 2% target, this lady isn't going to lift rates or reduce accommodation.
Look at CPI, hasn't been this high since 1996.
Jerome is saying differently. He's tapering & lately CPI is corrosive.
This chart is powerful right? How did we get here - inflation at all time since since the 1990s & central banks say negative interest rates still NEEDED.
Once you're NIRPED, hard to go PIRP. No matter what Draghi said, this isn't TEMPORARY.
And so, here we are. What about 2022?
I gotta go as this week is crazy busy given our Outlook coming out & I have to say I have had a lot of fun thinking about the Asia Pacific region locally, regionally and globally.
Learned a lot & frankly the exercise cements my passion to learn & important to sit back & read.👋🏻
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India unveiled its FY25 budget yesterday (btw, they have another one in 6 months) & it was very much a fiscal consolidation, jobs, and responding to people's beef about the woeful labor market (Modi lost seats in Uttar Pradesh).
Before I talk about the Budget, let's talk about India labor supply & demand. Ready?
As you know, India is the most populous country in the world today & will be even more so in the future.
Let me put it a different way, by 2040, one out of 5 people will be Indian.
So what happens to India matters because it's a fifth of the world population by 2040.
India will have more people than China or the same as China and the US combined.
Yes, a lot of people. That's beautiful (generally referred as demographic dividend assuming that we have jobs for them) and highly problematic for India (high joblessness and civil unrest), Indian politics and also how to manage this massive supply of people (skilling them, finding jobs for them etc).
First, nickel is a material that has to be DUG out of the earth & process. Some easier (colder nickel in Russia) & some harder like wet & warm places like Indonesia where you have plenty of it but it's the processing that's difficult.
Here comes China.
The mining & processing of nickel are energy intensive. And more importantly, for Indonesian nickel, it was considered too low grade to do & China had breakthroughs in a technology called high-pressure acid leaching (HPAL). "Low-grade nickel ore is placed into pressure vessels, where it’s treated with sulfuric acid and heated. After that, the nickel that separates out will be suitable for batteries, once it’s refined"
China new home sales fall further & while some may say that the real estate is now not so important for China, it remains a key driver of wealth effects & that is negative. Meaning, the data dump that we will get in 10 mins will likely show a further misaligned economy where consumption falters while supply rises.
This will add to further tensions with the West & even the South as China will need to export that excess supply, driven by policy to rise in the value chain, or to vertically integrate its supply chain, to the rest of the world.
Chinese corporates will increasingly have to do it via tariff arbitrage, as in third country export or building factories where they want to sell.
Some say it doesn't matter as Chinese firms gain market share.
Actually, it does matter. Employment matters. So unless they can get Chinese workers to manufacture goods in third country or in the country/region of export, over time, employment demand will fall in China for manufacturing.
Instead of a landslide, we got earthquakes, Modi & the BJP got the most seats but much less than they benchmarked (400) & less than 2019 (303) at 240. To govern, they need to work with fickle allies to operate a coalition government.
This will require a much more consensus driven governance.
That may be positive or negative depending who u are. Meaning, in the short-term, forming a government takes priority over long-standing reforms that are already politically difficult when they had the government. We may have more fiscal welfares & so if we continue with the same capex, fiscal deficit may widen. Or we may have less capex than before. Irrespective, this area will be watched carefully. Under Modi, grain & fertiliser subsidies remain large & was promised to be in place.
Note that India fiscal deficit has consolidated as of late but remains large. What has changed is the quality - higher tax rev ratios & more capex & less subsidies as share of GDP
Some say that a coalition won’t change as it is still Modi in change. But that is IF a coalition stays the course (he got some really fickle allies) & this that if adds to risk premium in the short-term.
Irrespective, India fiscal is in a rather decent shape so we have a solid foundation to work with here.
This article in the FT doesn't make any sense. The author argues that Modi fails to create job for low-skilled people, esp labor-intensive manufacturing. It also faults Modi for its high-end growth (services, high-tech, infra, etc)
But then it ends with saying, well, don't bother to even develop manufacturing and just work on service exports.
Btw, all the critiques of India makes sense. The issue I have with Rajan and also Congress is their solutions.
They don't have one. Literally. Rajan tells India to forget about trying to do manufacturing & focuses on services.
India exports a lot of services. Manufacturing is the weak spot, not services!!! And if u want a lot of jobs, u need labor-intensive manufacturing.
A country with such a large population needs to growth via all sectors - services, manufacturing, agriculture etc. You can't leapfrog development & go to services.
India & the Philippines have tried that. Not working & hence need to include manufacturing & infrastructure building.