Good morning! Hope you have a great Lunar New Year and happy Tet! I did even if it was uneventful. First year as a mom and giving out lots of li xi. Now, back to our regular programming of daily reminder of brent 92.8/barrel and markets completely priced out negative rates in EUR
Let me put this another way, Brent crude is +19.35% so far this year and other commodities like palm oil is up too.
I hope u listened when I said you should fear inflation more than Omicron. The Scandinavians have decided that pandemic is over.
Anyway, let's stay w/ inflation.
Let's look at global rates - what do you see? Or shall I say it differently, what don't you see?
NEGATIVE EUROPEAN RATES, esp BUND.
Ok, why? Inflation! I told you, central banks DO NOT PROMISE YOU A ROSE GARDEN. Christine changed her tune when CPI hit 5.1%.
So did JPO at 7%
Let's stick with inflation again. We have US CPI out at 930pm HKT on 10 Feb and markets expect US inflation, wait for it, to INCREASE, to 7.3%YoY and core to rise to 5.9%, yes, that excludes oil and food. So everything higher!
What will Jerome Powell do?
Markets, by that I mean the bond market, are fretting this CPI release. Why? It's pricing in 50bps hike for March and for 2022 141bps.
That's a lot. A lot of hikes. If we stick w/ our topic du jour, which is inflation, then what do u it will do if COMMODITY PRICES ARE UP.
Should u fear inflation or Omicron? If you listen to me, then you should focus on the former not the latter. I went on every outlet that I could to beat the drum that Southeast Asia isn't going to lockdown & persist w/ endemic.
Commodity prices UP ytd! Should u fear inflation?
People spent a lot of effort on how high natural gas, oil etc are. But let's not forget that OTHER COMMODITIES, whether agriculture or metals, are UP!
Look at palm oil. It's up and good for Malaysia as Indonesia limits exports but BAD FOR THE WORLD & by that I mean consumers.
Palm oil is used in everything that it's up! Do you think Unilever isn't going to raise prices?
You bet it will. If everyone raises prices, then prices get raised further as when wages go up, well, well well.
Stops being transitory and starts being pretty real.
JPO gets it.
While commodity prices are on the rise, China PMIs just show that the economy is slowing down in Q1 2022 with the composite for both state and Caixin PMIs weakening.
Monetary policy divergence between the Fed and China or rest of the world vs China where zero-Covid remains.
Why China is sticking to zero-Covid even if it weakens its growth, as in consumption?
From winning the Trump trade war, India is now the US President’s biggest target. The Trump administration imposed a 25% tariff on India. To add insult to injury, Trump announced another 25% tariff, effective tomorrow, on the grounds that India imports crude oil from Russia.
Indian goods bound for the US will now face tariff rates similar to China’s if we include the Trump 1.0 tariffs, making any China+1 strategy in India less competitive for US markets, and relative to Southeast countries, which for the most part face tariff rates of about 20 per cent.
Will the additional 25% tariff stick? While Russia’s war with Ukraine isn’t going to end by Wednesday, the secondary Trump tariff is likely temporary. Therefore, the question is not whether India will be able to bring the 50% back down to at least 25%, but when.
Eight months after Trump has been inaugurated and we of course have now the EU US deal. What do we know about Trumponomics?
I would say my read is the Miran paper is a blueprint for Trump actions so far on trade. Let's see what I mean by that. And this has consequences of how Trump sees India, which I think is not just escalation to gain leverage.
First, let's talk about an important ally, the EU. The details are out and I would say this is actually rather good for the EU in the context of out of control Trump tariffs.
Why? EU tariffs are NOT stacked. They are ceilings. As in, they get 15% max, including sectoral tariffs like auto (including car parts), pharma, semiconductor, lumber etc but not steel & alum, which they are still trying to negotiate. There are some additional exemptions for EU products such as aircraft, parts, generic pharmas & ingredients etc.
Meaning, to trade for this 15%, the EU is falling closer into the US orbit via investment and trade as well as defense, which it is working on being more self sufficient with increased spending but not just yet.
Anyway, what can you say about other allies? It means South Korea and Japan can and hopefully have similar terms.
Remember that reciprocal tariffs under IEEPA aren't the only ones. Section 232s are pretty scary and more stuff being added all the time without warnings.
An example is steel where a few days ago 400 more products were added to include steel derivatives.
So if you want to have access, this is basically what the costs are and so what does that tell you about others? Here I go back to the Miran paper.
Guys, let's do it. All things Trump tariffs. Here we go. First, let's talk about the basics. 10% is the floor as in everyone gets that. And these are the economies that get higher than that:
15% (EU, Japan, South Korea and 33 countries: Angola, Botswana, etc.)
18% (Nicaragua)
19% (Cambodia, Indonesia, Malaysia, Pakistan, Philippines, Thailand)
20% (Bangladesh, Sri Lanka, Taiwan, Vietnam)
25% (Brunei, India, Kazakhstan, Moldova, Tunisia)
30% (Algeria, Bosnia and Herzegovina, Libya, South Africa)
35% (Iraq, Serbia)
39% (Switzerland)
40% (Laos, Myanmar)
41% (Syria)
In Asia, it looks like this. Excluding China and Myanmar, Laos, India got the highest - 25% and maybe more.
China is waiting for talks on extension. Right now, it's 10% reciprocal + 20% fentanyl during extension + 25% during Trump 1.0
Southeast Asia gets 20% to 19% except Laos & Myanmar at 40%, Brunei is 25% but energy is exempt so...
India original was 26% so 25% seems bad but frankly not too far from the Southeast Asians. That being said, India was aiming closer to 15% as Vietnam got dropped from 46% to 20%.
Anyway, let's talk about details of the White House info.
It goes into effect 7th August. But if you got stuff in ports/front-loading and not yet consumed till 1 October, there are varied rates for them.
Long story short, there is still time to negotiate this down before it goes into effect basically.
Trump tariff strikes India at 25% plus Russian oil import punishment. Is it a surprise? Not exactly. I have been thinking for a week what a US India deal look like. And to be honest, I think I saw this coming. I think India can negotiate down from this threat btw. It's not final. But how much lower and what are the costs?
Why is it not a surprise that India is not getting the deal that it is working hard on?
First, let's look at the EU and Japan - they got smacked with 15% tariff & got reprieve for auto (and other sectors) but auto is key at 15%.
So 15% is the best India can get. And it won't get it. Why? Well, it has to offer a lot to Trump to get that and it won't.
Remember that this is just a threat (similar to what Trump did with Japan before they settled on a lower number) and the threat I suppose can be real or not. Irrespective, he cares about it enough to post about it.
Trump has a few agendas that he wants India or Modi's help with.
Ending that Ukraine War is one. And India is not interested in that. It's an emerging country that buys where it can cheapest.
Russian oil is cheapest & so it buys from Russia & Trump wants to starve Russia of oil revenue. India doesn't want to not buy the cheapest oil possible. Besides, Russia is neither a foe nor a friend.
Maybe the West's foe but not India. So on this point, very hard. What are the costs to India? Well, it will have to pay more for its oil if it doesn't buy the cheapest oil.
India imported 15,000 cars a year. Why? It has 110% tariff on autos. Now, trade negotiations are not going well and it's approaching the WTO on Trump's 25% auto tariff.
But the reason is simple. India exports more than it imports autos. Why? It has pretty high tariff on auto.
What would an India trade deal look like then? Is there going to be one?
What's interesting is that the UK and India signed a trade deal that is supposedly a huge game changer.
Let's take a look at it.
Under the agreement, tariffs on imports of internal combustion engine (ICE) cars will be slashed to 30-50% in the first year of implementation, but with the benefit limited to a quota of 20,000 cars.
The tariffs will be reduced gradually, and after 15 years, they will become 10 per cent, with the quota set at 15,000 units. For out-of-quota imports of ICE cars, the duties are reduced to 60-95 per cent in the first year, and further to 45-50 per cent from the tenth year onwards.
So on the surface, it looks like a big deal but the quotas are so tiny that it makes one wonder.
Of course, relative to annual import, quotas are HUGE as it is MORE than annual import.
But why do people care so much about US 25% auto tariff but don't care so much about India's 110% auto tariff?
Well, because the US imports 8m cars EVERY YEAR.
Look at the big deal that is the UK and India trade deal liberalization. There is a limit in quota.
The quota that the US sets for the UK is 100,000. So in other words, the US remains a big deal and one that needs to be negotiated with.