Today's positive US jobs surprise comes on the heels of yesterday's likewise surprising increase in China's FX reserves. Though these encouraging signs two weeks after Brexit are unlikely to dispel the consequent uncertainty which abounds in Europe and Japan - including more talk of such extraordinary measures as negative interest rates or even "helicopter money" for consumers and firms - they suggest that Chimerica's twin pillars are standing relatively firm at the moment. The S&P 500 is sitting pretty at just a wisp below its all-time high.
Nonetheless, it's hard to see a more hawkish Fed emerge for at least a few months. That's in no small part because the yuan has shed 1.8 percent against the greenback in the wake of Brexit - translating to as much as a 20-basis point jump in real US interest rates, with more probably on the way. That all but takes September off the table for the next 25-basis point fed funds increase and puts December into even more doubt (it was already about 50-50 before Brexit).
To those horrified of deflation, this amounts to Chinese currency warfare under the cover of British and European turmoil - to say nothing of the convenient fresh attack line it gives Mr. Trump. But in fact the yuan's recent fall is just as much a concession to the mythic "free market" that Western experts still can't fall out of love with: with the pound and euro having shed as much as 10+ and 3.5 percent from Brexit shock starting June 23, the yuan's 1.8 percent decline (from about 6.58 to 6.70 per USD) is just about right; notwithstanding the suffering that an 8 to 9 percent appreciation of the yen on the yuan in this same period is clearly causing Tokyo. Further, the yuan's continued decline against the rest of its trade-weighted currency exchange basket is reflective of Beijing's understandable attempt to tame its domestic industrial deflation by boosting commodity import prices - if it didn't do this, its disinflating exports to the rich economies would be even more of a drag on them.
Needless to say, it's cold comfort for any of China's trading partners individually that Beijing's trying to distribute its deflationary damage as evenly as possible across all of them. But there are as yet few indications that PBOC's recently leaked bottom line of an even lower 6.8 per dollar for the rest of 2016 is a deliberate policy target as opposed to its intended defensive floor; even should we see this level in the coming weeks, traders and speculators should be on notice that "Mommy" (PBOC's nickname in the Chinese finance industry) will at that point be prepping some pretty heavy artillery to fire.
If one considers Chimerica - indeed, the global economy as a whole - as an integrated (however imperfectly) system, it's easy to see why everyone's a Keynesian now: it's not because Keynes has been of much help reigniting the flames of global growth lately, but simply because the alternative is even less palatable.
In fact, we may be entering a new phase of global monetary history: the era of unadulterated zero, near-zero, or outright negative interest rates as the norm, not the anomaly. This isn't to question Ms. Yellen's or the Fed's commitment to normalizing rates within a reasonable timetable; it's simply to observe that this is beginning to seem pretty impossible when just about everyone else is gearing for monetary loosening as opposed to tightening - if not via rate cuts then certainly via currency depreciation.
A mere 2 percent further fall in yuan/dollar pushes the next Fed hike to mid-2017 or later - and there's a good chance it'll happen in this Q3. Even worse is the potential effect this could have on global sentiment should Beijing botch its delivery even partially to set a USDCNY ceiling at 6.8; in concert with chronic uncertainty and weakness surrounding the European financial system, the UK's future prospects, and yet another Japanese recession, that would be sufficient to bring a Fed cut back to zero on the table.
No comments:
Post a Comment