June 2 FT Thoughts Inflation, Jobs, Covid, China robots not babies and FX

02 Jun

This and previous notes can be found on SubStack Asian Market Sense
Check out ERI-C.com  for your research needs

Asian markets at 1pm HK time
Market opened higher and worked higher through the day after good GDP data Currently +70pts (+1%) @ 7,212 a new all time high and despite an extension to the Melbourne lockdown. Mining, Minerals and Oil leading. WesFarmers +VE along with Woolies on news it’s to enter the payments business with WPay.
But Nuix testing its lows after Mondays downgrade of forecasts.
GDP Growth Rate Q1 +1.8% QoQ vs +3.2% Q4 revised (F/cast was +1.5%)
GDP Growth Rate Q1 +1.1% YoY vs -1% Q4 revised (F/cast was +0.7%)
Nikkei opened lower and initially dipped to 28,566 before working hgiher to 28,942 at lunch. PM tested higher to 29,000 but failed to break above and drifted lower. Currently +104pts (+0.4%) @ 28,920
TOPIX Traded in a similar pattern, low was 1,917 high 1,947; currently +15pts (+0.8%) @ 1,941
S Korea 
Pre market inflation data was inline @ 2.6% raising hopes of an increase in corporate earnings and quick economic rebound from the pandemic. But at 9:45am the KDCA reported 677 new covid cases (vs 459 Tuesday) back above 600 with 654 local cases. -VE
Kospi opened slightly higher and rallied to 3,241 in the first hour but then reversed and trended lower to 3,216 at midday. Bounced to flat and has traded sideways. Currently flat at 3,221
Kosdaq opened higher dipped to 984 worked back to the opening level of 985 in the first 30 minutes but then trended lower to 978 at middday before starting to work better. Currently -4pts (-0.4%) @ 980
Taiex opened higher and tested 17,275 in early trades but failed to break out and treated to test 17,162 (Tuesday’s close) before bouncing to traded around 17,215 for around an hour but then sold down to 17,056 just before midday and then worked better to close +3pts @ 17,165
CSI 300 opened slightly higher but trended lower to 5,280 just after 11am before a bounce and then eased into lunch. PM opened on the lows and worked higher but resistance at 5,300 currently -54pts (-1%) @ 5,288
Pre market opened @ 29,415 -53pts vs +50pts ADR’s
Dipped to 29,365 before bouncing to flat but then trended lower to 29,250 before a bounce into lunch (29,321). PM opened flat small bounce but now drifting lower; currently -160pts (-0.5%)@ 29,307
WH Group suspended pending insider news.
E commerce weak after new fines and China Financials weak too
Tech and Oil firm.
Expect a mixed open FTSE -3 points at 7,079, Germany’s DAX +20 points at 15,588, France’s CAC 40 +3 points at 6,491 and Italy’s FTSE MIB +4 points at 25,332, according to IG.
Eurozone PPI
Retail Sales
Budget Balance
BoE Consumer Credit, Mortgage Lending, Mortgage Approvals, Net Lending to Individuals
US Futures
Opened Dow -13pts S&P and NDX slightly lower
AHEAD MBA Mortgage Applications and 30 yr Mortgage Rate, Redbook, Beige Book, API Crude Oil Stock Change.
Fed Speakers Harker, Bostic, Evans and Kaplan
Earnings: Advance Auto Parts, Lands’ End, NetApp, Splunk, Cloudera, PVH, C3.ai

Print Front Page
Eurozone inflation surge raises stakes for ECB’s policymakers

• Central bank target broken • First breach in more than 2 years • US prices also climbing.
'Eurozone inflation rose to 2 per cent in May, the first time the rate has surpassed the European Central Bank’s target in more than two years, complicating next week’s decision on whether to maintain ultra-loose monetary policy'
I think there are more and more signs that the inflationary signs we are seeing means that inflation is going to be structural and not temporary. It is interesting to note that by temporary policymakers are suggesting it will only be around for a year. I don’t think that is a good definition of temporary. Inflation around for that length of time influences peoples thinking and expectations and thatis what will drive wage inflation. That is the area that the US Fed seems to be focused on. The trouble is having allowed inflation to take hold it will then require drastic action to reverse it.
The article talks about the recession in the euro area dampening wage growth after ‘millions lost their jobs, went on furlough or left the workforce during the pandemic.’ I worry that a lot of the jobs will come back but many of the employees will not; especially in the lower paid sectors. It mentions ‘James Bullard, chief of the St Louis Federal Reserve, told the Financial Times the US labour market was tighter than it looked, which could accelerate the timeframe for removing stimulus.’ (see more below)
It concludes ‘In a sign that supply-side inflationary pressures are building, a closely watched business survey said eurozone manufacturers faced unprecedented product shortages and price rises, constraining their ability to meet demand.’
I don’t think that is limited to Europe, the US and other developed nations are seeing the same, driving global inflation rather than national inflation.
A good read But see also the Big Read INFLATION
A new era: is inflation coming back for good?
FT series Central bankers remain calm despite concerns that post-crisis stimulus could lead to inflation, but changes in price trends often occur just as authorities dismiss the risks.
A very good read looks at the examples from history and notes a little inflation is good but broke out in the past just when everyone thought it was under control.
Uses the headings of
Oiling the economy
Demographic pressures
I still think this belief that there is slack in the labour markets is mis-placed. There may be people available for work in the system but whether they are in the right location and have the right skills is a very different matter..
It concludes ‘But, for the first time in many decades, there is the possibility that a significant turning point has arrived, that price rises will be more than a flash in the pan and something more difficult to control.’

J&J faces $2bn payout after talc powder cancer case rejected by Supreme Court.
Interesting that the court decided not to hear the appeal. J&J share price fell on the news.

EU to unveil digital wallet for citizens
App aims to provide secure way for people to access services online.
A significant step forward if if can be agreed across the whole of the EU. There are already some digital ID’s in Europe but most countries systems are not compatable with each other.
It will be interesting to see the appraoch to security in the light of recent high profile hackings.

Fed official upbeat on US jobs market
St Louis president says central bank close to launching a discussion about tapering.
A very good read
He points out that the US labour market is tighter than the headline data suggests, with some indicators showing the market in certain areas back to more normal levels. He is also suggesting looking at different indicators; suggesting the ‘unemployment to job opening ratio, which was at a low of 0.8 in February 2020, rose to 5 during the first lockdowns, and was back down to 1.2 in March 2021’. He also said “I would say we should re-examine what we think we’re expecting out of the labour market,” he said. “And the reason I’m pushing people in that direction is I think it’s more consistent with the anecdotal evidence that we’re getting, which is that it’s very hard to hire.”’
He notes however that whilst he and others are more anxious than others to start the discussion it is up to Fed Chairman Powell to decide when the Fed starts discussing it.
It mentions how some of the Fed targets regarding the economy had seen progress, like CPI but that on employment that was not the case according to Fed vice-chair Quarles. Bullard thought they has and commented ‘the central bank may be waiting in vain for payrolls and labour force participation to recover fully, as many of those workers were “marginally” attached to the workforce, and older ones may not return.’
He noted that whilst the economy was rebounding he was not certain employment would too. He maintained the Fed line on inflation and was happy with the new framework which allowed for periods of higher inflation. He also rejected criticism that the US could see a repeat of the 1970’s inflationary spiral. Saying he thought they were in a very different regime and that ‘Fed would tread carefully, moving to raise them (interest rates) from their ultra-low level only after asset purchases had been wound down, roughly the same “play-book” used after the financial crisis.’
It concluded ‘“I’m cognisant that this is a different situation; maybe things are moving faster, or certain types of pressure won’t materialise the same way we thought they would. And to the extent that’s the case, we may have to be nimble, but we have plenty of time to adjust on that.”’
There are plenty of risks but that interview was carefully managed by the Fed to support it case and allow it scope to widen the discussion.
In that vein its interesting to note that Stephen Roach has written on his time at the Fed in the 1970’s under Chair Arthur Burns and what happened back then that let the inflation genie out of the bottle. He says the Fed “sat on the fence and fell behind the curve” believing that inflation was transitory and succumbing to political pressure at the time when President Nixon did not want higher interest rates that would induce a recession and cost him the next election. The Fed waited and waited, and then the inflationary surge arrived which inevitably pushed rates to near 18%. This cycle will likely prove different again, but the similarities are there with both the 1970s and the current pandemic period – with both succumbing to economic shocks, which had (will have) long run ramifications.
The Fed as always is in a tricky position of managing its twin mandates. It is aware of the risks of winding down stimulus too quickly from what happened post the GFC. The risk is that is has forgotten the risk of not winding down in a timely manner.

US manufacturing drive hampered by shortages
Worth a read, looks at yesterday’s ISM manufacturing data.
Key ‘manufacturers are grappling with a range of challenges, such as parts shortages and a tight labour market, that have weighed on productivity.’
Interestingly the employment element slowed as labour shortages impact, which is in-line with what Bullard was saying above; that in certain sectors there were hiring difficulties.
It seems to me the more you look around the more you see examples of inflationary pressures. We have not in living memory had a pandemic and so there is no play book for the recovery, so as Bullard says there is a need to be ‘nimble’ but I would question if we have time.

Vaccines burnt amid rollout hitches
Delivery delays and tight dose expiry dates are said to be hindering campaigns.
An interesting read. It reflects the speed with which the vaccines were developed and the caution the makers have about shelf life. Most it appears have short expiry dates although in some case the manufacturers have extended them. The key again is how little we know about the what if’s.
‘Part of the problem, according to global vaccine alliance Gavi, is the “extremely cautious” expiry estimates attributed to the main shots by manufacturers. The AstraZeneca jab, which must be stored at 2C to 8C, has a shelf life of six months. The BioNTech/Pfizer shot can be stored for six months at -90C to -60C but only lasts up to five days once thawed and refrigerated.
Sinopharm’s vaccine is an exception, with a fridge-temperature shelf life of 24 months. Most non-coronavirus vaccines have an expiry date of about three years, Gavi said.
In response, several manufacturers are conducting stability tests and requesting extensions to the shelf life restrictions on their shots to give governments more time.’
Worth a read.

Taiwan’s strong record on Covid undone by an insular approach
A good read about how the initial success allowed the Health minister the authority of putting in motion a regime that has come upstuck when a few people failed to observe the rules.
Interestingly for all the mistakes, Taiwan has managed to re-organise and effectively deal with the situation; unlike places like India. The question now is whether it has the situation under control or we have more to come.
It will be interesting to see whether the same is true in China as it sees a surge in cases in Guangdong.

Meat supplier JBS suffers cyber attack disruption

The latest known target and likely to hit meat prices globally. JBS controls around 20% of the US meat processing.
Interesting that the online edition has ‘A criminal organisation that is probably based in Russia was behind a ransomware attack that has disrupted animal slaughtering at JBS, the White House said after it was informed by the world’s largest meat processor, as reduced operations threatened to curtail beef supplies and drive up prices.’
One can’t help but wonder whether these are being orchestrated by Putin in repsonse to western governments criticism? Additional whether the US Government cyber teams will be allowed to mount a retaliatory action?

China deploys financial crisis-era measures to temper renminbi rally
The PBoC increased the RRR requirement for forex on lenders; from 5% to 7%; a huge increase. ‘It will restrict the domestic supply of foreign currencies, making it harder to use dollars to purchase renminbi onshore, potentially easing demand for the Chinese currency.’
It mentions though, how within the PBoC there seems to be divergent views with some advocating a strong Rmb to counter the rise in commodity prices. Although that would hurt the exporters.
The key concern for Beijing seems to be keeping ‘inflation of producer prices, which rose 6.8 per cent in April, passing through to consumer price inflation, which remains low.’
There have been a number of articles written on this recently. One key element is the relative weakness of the US dollar but it serves to illustrate how inter-related economies have become.

LEX China demographics: back robots, not baby booms
Makes an interesting observation that ‘Since Beijing implemented a two-child policy in 2016, the rate of decline in new births has accelerated.’
‘Chinese families are following a pattern seen in many countries: an inverse correlation between wealth and birth rates. People earning decent wages save for retirement and invest more in fewer children. GDP per capita in China has grown tenfold in the past two decades. Expectations have risen along with the cost of living, from housing to healthcare.’
Concludes ‘Beijing cannot reverse the decline in China’s working-age population simply by telling people they can have more children. Investors should forget about baby toys and infant formula. The opportunities will be in automating China’s factories and in healthcare for seniors.’
China has already been automating for sometime but this is again +VE news for the Japanese robotic sector and also the HK listed E-health names; subject obviously to regulators. But just as China is opening up its wealth management because of Pension concerns it is likely to encourage more Ehealth solutions.

Wall Street’s Spac-powered gravy train hits the buffers
• Investment bank fees fall to $430m
• Deals hit by lacklustre share prices
Key seems to be lacklustre share performance, questions about initial stakeholder priviledge and the potential for more regulation.
‘Spacs typically have around two years to agree an acquisition and the deal slowdown has quickly fed through to the IPO market. Some specialist investors, usually hedge funds, buy into Spac IPOs and sell after a merger is announced, so delays caused by the extra regulatory scrutiny have kept money tied up that would otherwise be used to back new offerings. The leverage available for that trade has also been cut.’

US listing plan by Vietnam’s answer to Tesla is a leap of faith
An interesting read on Vingroup. I think the move into EV’s is a good one. The article notes '“VinFast — like any EV start-up — will encounter daunting challenges when entering the US market,” said Michael Dunne, chief executive of ZoZo Go, an automotive consultancy. “How are you going to convince American buyers to take a chance on the new kid on the block?”' The key being that apart from Tesla all the EV makers are ‘new kids on the block’

Oil prices rally as Opec+ agrees gradual supply rises
The Opec meeting was one of the quickest, just 30 minutes suggesting broad ageement on the issues and a willingness to let oil prices rise as demand recovers. Another institution that doesn’t see inflation as an immediate problem.

Reopening of economy sets up Wall Street contest
Some are intent on gains from the return of normal life while others focus on lasting changes.
Looks at the different ways that Blackstone, Apollo Global Management and Carlyle has positioned themselves during the pandemic.
In summary ‘Some hope to benefit further from a resumption of normal life, having invested in airlines, car rental companies and travel agencies that could earn windfalls if newly vaccinated Americans rediscover wanderlust after months of isolation.
Others believe they have spotted lasting lifestyle changes inspired by the pandemic, the effects of which will be felt for years in healthcare, retail and beyond.’
An interesting read not least because they each seem to have found their own niche rather than all focusing and competing in one area.
Well worth a read.

Asset management. High valuations
Investors hunt for new model to counter glum outlook
Decades after Swensen shook up investing world, managers search for the next big idea.
An interesting read, the 60/40 protfolio worked well for 40 year but no more. The Yale model that many tried to replicate is now crowded and so the question is what is next good idea?
Some Canadian funds are looking at a DIY approach to large investments; using internal teams to ‘buy companies and infrastructure projects directly, either alongside a private equity partner or replacing them altogether. In-house teams can be costly but not as expensive as the juicy fees charged by private equity.’
But it is not without its risks and costs.
An interesting read.

Markets Insight
The real bond kings and queens sit on Fed throne By Bill Gross
An interesting read. Acknowledges the power of the Fed but wonders how long it can continue. Their intention of trying to get the US back to 3 per cent real growth and 2 per cent inflation is laudable but is it achievable?
To quote ‘Even enthusiasts of the Fed’s policy must wonder whether hundreds of cryptocurrencies or a boom in special purpose acquisition vehicles are the result of continuing financial innovation or the product of cheap and plentiful credit demanded by deficit spending and an accommodating Fed chair.
Powell will not even acknowledge asking the question about asking the question until Covid is more under control and employment returns to historical norms. Yet unemployment may never return to 4 per cent, given the radical changes in working from home and Zoom-like technological shifts.’
Asks how Treasuries can trade at such low yields; accepts relative value, trading uplifts as bonds approach maturity and of course the Fed’s own buying; which leads him to comment; ‘No wonder the 10-year Treasury rests illegitimately at 1.65 per cent.’
Key he says is ‘the consistency of Powell’s vow to keep short rates unchanged for the foreseeable future.
At some point in the next few months, hopes for this will probably be disappointed as inflationary pressures pose price risks to Treasuries and stocks.
The Fed cannot for long maintain current policy rates and expand its own balance sheet and, therefore, private bank reserves at a $120bn monthly pace.’
He concludes ‘Ten-year Treasuries morphed into the “risk” asset category several years ago. Stocks with valuations supported by low yields have entered the same category now, no matter the growth potential for 2021 and 2022.
Cash has been trash for years but soon it may be the only haven for investors sated beyond reasonable expectations of perpetually low yields and supportive bond kings and queens.’
I find myself agreeing with much of what he says; although his arguement does suggest that Gold or maybe crypto could be the answer rather than straight cash. European steel industry warns over end to free carbon allowances
An interesting read; the key arguement from the steel producers being ‘withdrawing the free allowances too quickly would result in a steep rise in operating costs that would undermine companies’ ability to invest in low-carbon technologies.’ That they say would put them at a huge disadvantage to international competitors.
Interesting because most steel producers are international players

Cairn Energy on India airline’s tail in legal saga
Oil business seeks seizure of planes over award of $1.2bn plus interest — but New Delhi shows no inclination to pay up.
An interesting read because it reveals how dealing with India can at times be similar to dealing with China.

Osaka shows a shift in sport’s balance of power
Real value lies in what happens in the stadium, not the press room
Worth a read and remembering that sports stars are people too.

The pitfalls of modern battleship diplomacy
UK, France and Germany must beware of giving China mixed messages.
The conclusion is ‘The risk is that Beijing may conclude the real lesson to be drawn from such carefully calibrated deployments is that the UK and other European powers would actually stand aside — if China were ever to attempt a blockade of Taiwan.
In reality, neither Washington, Beijing, Taipei or London could be sure how such an unprecedented international crisis would unfold. It would be wise if all parties ensure that we never find out.’
An interesting read.
A windfall for poor countries is within reach
High-income states can help by reallocating their IMF special drawing rights quotas by Martin Wolf
Another look at the possible uses of Special Drawing Rights at the IMF.

G7 leaders can strike a blow on global corporate tax
Joseph Stiglitz a professor at Columbia University
Concludes ‘The leaders of the G7 can either be a force for change or they can reinforce the status quo. The US has made the right move. Now it is Europe’s turn to take its responsibilities seriously and ensure the winners from globalisation contribute to the wellbeing of future generations.’

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