From The Fourth Of July To Le Quatorze Juillet

By Philip Marey, Senior US Strategist at Rabobank

The high tech trade war between China and the US continues. China will start export controls on gallium and germanium, two minerals used in the production of semiconductors, and a range of related metals on August 1. Meanwhile, the Biden administration is preparing to restrict the access of Chinese companies to US cloud-computing services. Later this week, Treasury Secretary Yellen will visit China to improve relations.

Yesterday, the ISM manufacturing index fell to 46.0 in June, from 46.9 in May, The Bloomberg consensus expectation was a rebound to 47.1. The ISM manufacturing has been below the neutral level of 50, which distinguishes between expansion and contraction, since November, but has now reached its lowest level since May 2020, shortly after COVID-19 broke out in the US. The employment sub-index fell to 48.1 from 51.4, indicating a net loss of jobs in the manufacturing sector in June. The prices paid index fell to 41.8 from 44.2, well below the Bloomberg consensus expectation of 44.0. This underlines that inflation in goods has fallen back, with services being the main driver of elevated inflation at the moment. Note that the services PMIs are still consistent with expansion. The final estimate of S&P Global’s US manufacturing PMI remained at 46.3 in June, also well below the critical level. Note that we still expect the US recession to start in the second half of this year. The manufacturing PMIs, which are always the first to head south, are already flashing red. That is also why we have doubts about another Fed rate hike after July, if Powell insists on a more moderate pace that would skip the September meeting and leave November as the next hiking month.

Meanwhile, the civil unrest in France continues, after spreading to a couple of cities in Belgium and Switzerland. The role of social media should not be underestimated here, as Brussels and Lausanne are both largely French-speaking cities. While the police officer who killed the 17 year old during a traffic stop in Nanterre on June 27 has been arrested, the riots could not be prevented as frustrations about policy brutality have been brewing in the banlieues. In contrast to the US, where the middle class lives in the suburbs and the working class and poor in the inner cities, in France it’s the other way round: the middle class lives in the cities and the working class and poor in the suburbs (‘banlieues’). Don’t think of the banlieues as endless rows of detached houses with well-kept gardens, but rather as a collection of neglected high rise housing projects. Similar to the US, the geographical sorting has taken place along ethnic lines. And also similar to the US, the French police are often seen as occupying forces. The thin blue line of lower middle class officers, protecting the rest of the middle class from the working class and the poor.

Earlier, in a letter, the French police union called the rioters “vermin” and “savage hordes.” Violent confrontations between the police and the youth in the banlieues have taken place since the 1980s. More recently, in 2005, riots in the French banlieues lasted for three weeks, which would imply that we still have two weeks to go. This could take the riots to Le 14 Juillet, the French equivalent of the 4th of July.

Economists like to quantify opinions. How about this one? In recent days, there have been two crowdfunding efforts related to the reason for the riots. As of Monday, more than one million euro has been collected to support the police officer who shot the 17 year old, while 234,000 euro has been collected to support the mother of the dead kid. Bienvenue en banlieue.