Rabobank: “Boom”

By Michael Every of Rabobank

“Boom!” No, not the massive beat in headline US payrolls on Friday (379K vs. 200K consensus). That was welcome, of course. As realists pointed out, the underlying data were weaker (weekly hours were down), and the lion’s share of new jobs were in poorly-paid sectors like food services. Then again, even when the US economy is doing well, most of the new jobs are in poorly-paid sectors that don’t support aggregate wage pressures. More than expected of what wasn’t ‘working’ previously is no game changer. Perhaps that’s why equities ended up on the day, not down, and bond yields little changed? Or perhaps a finger was on the scales, as some muttered? Either way, that was the market close.

More concretely, “Boom!” was the noise heard in key Saudi oil facilities as Houthi forces (no longer terrorists in US eyes) hit critical targets with a combination of drone and missile attacks. Despite neither life nor property being lost, and this not being the first time Saudi vulnerability to supply disruption from Yemen (slash Iran) has been displayed, it was enough to push oil up from USD65 to 70 a barrel. US olive branches are so far producing more ‘duck!’ than dove. That’s very much the zeitgeist: clever-but-conventional think-tank thinking failing to produce the right kind of boom.

Relatedly, financial media re crowing about Chinese exports, which soared by 60.6% y/y in USD. Yes, that’s incredible: but it’s distorted by the base effects from 2020 – something we are going to have to look through a lot; it’s still Covid related on the back of medical supplies and work-from-home gear, which underlines the global economy is stuck in a virus rut; and it isn’t positive for anyone’s economy but China’s (it’s actually a GDP drag), who we already know is focused on “dual circulation” – apart from the commodities it is snapping up globally, seeing their prices rise like oil. Yet that’s a boon to too few to be a “boom”.

Meanwhile, we have seen back-to-back state plans in China and the US: and in neither case is “boom” appropriate. In China’s case, the Five-Year Plan backed high tech and national defense, both of which will get spending increases of over and just under 7% y/y respectively –that’s news to anyone?– but concretely –something China knows a lot about– there were more questions than answers.

• What is the GDP growth target after 2021? (Don’t make people have to actually forecast it!);

• How is labour productivity growth “higher than GDP” to be achieved when it is now negative?

• If disposable income is to grow at the same pace as GDP growth, how is there any rebalancing towards consumption? That means overinvestment must continue: where?

• Why is the targeted unemployment rate of <5.5% higher than it was in 2020 during Covid?

• The hukou system will be reformed to help achieve 65% urbanisation vs. 60.6% in 2020: but who is going to pay for the social services local governments have not had to provide to rural migrants until now? And how is that compatible with a narrower central-government fiscal deficit and keeping control of off-balance sheet borrowing?

• How will innovation patents be doubled when they are already high? What quality will they be?

• How will the digital economy rise from 7.8% to 10% of GDP after what happened to Alibaba?

• Why are nurseries going to rise 1.8 to 4.5 per 1,000 people when the birth rate is collapsing?

• What does developing “comprehensive” domestic grains production capacity mean? And “diversifying” agri import suppliers? Does that meet the US Phase One Trade deal’s terms?

Some critics allege the above is ambitious to the point of bordering on two-plus-two-equals-five year-planning. Not that things look that much different in the US. The details of the fiscal package agreed by the Senate suggest it will be around USD1.8 trillion. So “boom!”….except what we see in the bill is:

• USD1,400 cheques per individual, phased out for those earning >USD80,000 – that will be saved by those who don’t need it, and spent on the bare essentials borrowed money was being used to pay for by those who do need it, and it will cover just a few months of those;

• Extending supplemental unemployment insurance at USD300 per week through to 6 September, including for the self-employed – this arguably prevents a downturn in spending rather than a feel-good increase;

• Covering health-care insurance of laid-off workers – a social good, not a demand boost;

• USD160bn for vaccine testing – positive, but little boost to GDP;

• USD360bn for state and local governments to stop them making cuts – so no new spending;

• USD10bn for infrastructure – which is hardly boom-time!;

• USD170bn to help open school – of which USD130bn represents new hiring of staff or physical improvements;

• Extending the eviction moratorium for renters and USD45bn to help low-income households pay bills – a social good, but sums that would have always been spent in more ordinary times;

• USD14bn for airlines to keep people on the payroll and USD8bn for airports to make Covid-related improvements – only the latter is ‘new’ money; and

• USD25bn for SMEs – welcome, but whose effectiveness we can judge in the next NFIB survey.

So the vast majority of the package is gap plugging, meaning a lot of two-plus-two-equals-fivery in the US as well. Yet even two would be double the 1% pay rise being offered to the British NHS staff who just risked their lives battling Covid. “We can’t afford more,” says a government de facto backstopped by the BOE when needed. I find this particularly ironic given I was arguing about the looming inevitability of MMT years ago, at a time when markets didn’t even know what it meant; the same markets are now hyperventilating about fiscal policies that fall massively short of MMT in practice – so they still don’t know what it means. There is nothing *structural* here to support sustainable wage inflation (and hence sustainable inflation).

However, a combination of base effects, US fiscal policy, and commodity price spikes mean higher headline inflation near term. That is going to continue to see markets –wrongly– push longer bond yields higher, and drag down equities with them. In short, markets want their five-year plan of central bank yield curve control. Australia is in the firing line, and the Fed. The former just flopped, as expected: and Powell missed the opportunity to calm markets before the start of the pre-meeting blackout period that now rules until 17 March. In short, the Fed now cannot say anything if markets try to push US 10-year yields back up towards 2 (plus 2)% from the 1.59% level they sit at this morning as I type: will any other central banks be willing or able to speak with the same authority in the meantime? It’s the ECB this week: and they have no recent form for foot-in-mouth press conferences at all…

More importantly, what will the Fed eventually say when they do next speak? What will it add up to? It depends what the market has planned, I guess.